Question

Diego Company manufactures one product that is sold for $74 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 45,000 units and sold 40,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	24
Direct labor	$	18
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	585,000
Fixed selling and administrative expense	$	423,000

The company sold 30,000 units in the East region and 10,000 units in the West region. It determined that $190,000 of its fixed selling and administrative expense is traceable to the West region, $140,000 is traceable to the East region, and the remaining $93,000 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.

9. If the sales volumes in the East and West regions had been reversed, what would be the company’s overall break-even point in unit sales?

10. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 40,000 units? You do not need to perform any calculations to answer this question.

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 40,000 units? You do not need to perform any calculations to answer this question.

12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2?

Answer 1

Please find below table useful to compute desired results: -

End results would be as follows: -

12. Profit would be Lower because in next Year because of Lower Manufacturing Base.