Question

Diego Company manufactures one product that is sold for $77 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 59,000 units and sold 54,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	27
Direct labor	$	10
Variable manufacturing overhead	$	2
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	1,298,000
Fixed selling and administrative expense	$	662,000

The company sold 41,000 units in the East region and 13,000 units in the West region. It determined that $330,000 of its fixed selling and administrative expense is traceable to the West region, $280,000 is traceable to the East region, and the remaining $52,000 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.

Required:

1. What is the unit product cost under variable costing?

2. What is the unit product cost under absorption costing?

3. What is the company’s total contribution margin under variable costing?

4. What is the company’s net operating income (loss) under variable costing?

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

Answer 1

Ans. 1	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$27
	Direct labor	$10
	Variable Overhead per unit	$2
	Total production cost per unit	$39
Ans. 2	In absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Absorption Costing:
	Direct materials	$27
	Direct labor	$10
	Variable Overhead per unit	$2
	Fixed overhead per unit   ($1,298,000 / 59,000)	$22
	Product Cost per unit	$61
	*Fixed overhead per unit = Fixed overhead / Units produced
Ans. 3	DIEGO COMPANY
	Contribution format Income Statement
	Particulars	Amount	Amount
	Sales   (54,000 * $77)		$4,158,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (59,000 * $39)	$2,301,000
	Variable cost of goods available for sale	$2,301,000
	Less: Ending inventory   (5,000 * $39)	-$195,000
	Variable cost of goods sold		$2,106,000
	Gross Contribution Margin		$2,052,000
	Less: Variable Selling and Adm. Exp.    ($3 * 54,000)		$162,000
	Contribution Margin		$1,890,000
	*Ending inventory units = Units produced - Units sold
	59,000 - 54,000 = 5,000 units
	*Total ending inventory = Ending inventory units * Unit product cost.
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Variable selling and administrative expenses = Units sold * Variable selling and administrative expenses per unit sold
Ans. 4	Particulars	Amount	Amount
	Contribution Margin		$1,890,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$1,298,000
	Fixed selling and administrative expenses	$662,000	$1,960,000
	Net operating income		-$70,000
Ans. 5	DIEGO COMPANY
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (54,000 * $77)		$4,158,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (59,000*$61)	$3,599,000
	Cost of goods available for sale	$3,599,000
	Less: Ending inventory   (5,000 * $61)	-$305,000
	Cost of goods sold (total)		$3,294,000
	Gross margin		$864,000