Question

Diego Company manufactures one product that is sold for $70 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 53,000 units and sold 48,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	21
Direct labor	$	10
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	1,060,000
Fixed selling and administrative expense	$	557,000

The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expense is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

5. What is the company’s total gross margin under absorption costing?

7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

8 a. What is the company’s break-even point in unit sales?

b. Is it above or below the actual unit sales?

Answer 1

5
Sales	3,360,000	=48000 x 70
Less: Cost of goods sold	2,544,000	=48000 X 53***
Total gross margin under absorption costing	816,000

Direct materials	21
Direct labor	10
Variable manufacturing overhead	2
Fixed manufacturing overhead	20	=1,060,000/53000
Unit product cost under absorption costing	53***

7) ANS:-

Fixed manufacturing overheads become a part of inventory under absorption costing while it is charged as a period cost under variable costing

Income under variable costing income statement = Sales – Variable costs – Fixed costs

= (70-21-10-2-4)*48,000 – 1,060,000 –557,000

=1,584,000 -1,060,000-557,000

= $(33,000)

Since inventory has increased, amount of fixed manufacturing overhead deferred in inventory under absorption costing= Fixed manufacturing overhead *Ending Inventory/Total produced

= 1,060,000*5,000(53000-48000)/53,000

= $100,000

Absorption costing net operating income = -33,000+100,000 = $67,000

8) Caculation of the company's break-even point in unit sales

Break even point in unit sales = Fixed cost/Contribution margin per unit

Break even point in unit sales = 1,060,000+557,000/(70-37(21+10+2+4) )

Break even point in unit sales = 1,617,000/33

Break even point in unit sales = 49,000 units

8b) it is above the actual unit sales