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. 14. Diego is considering eliminating the West region because an internally generated report suggests the region’s total gross margin in the first year of operations was $66,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East region's sales will grow by 5% in Year 2.

Using the contribution approach for analyzing segment profitability and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 2?

Answer 1

Answer 14.
Income Statement
of year 2
	Current Situation			Drop West Region
	Total Company	East	West	East
Sales In Units -	48000	36000	12000	37800
SP per unit	70	70	70	$70
Total Sales (A)	3,360,000	2,520,000	840,000	2,646,000
Less: Variable Costs
Manufacturing:
Direct Materials - $21 per Unit	1,008,000	756,000	252,000	793,800
Direct Labor - $10 per Unit	480,000	360,000	120,000	378,000
Variable MOH - $2 per Unit	96,000	72,000	24,000	75,600
Variable Selling & Admn. Exp. - $4 per unit	192,000	144,000	48,000	151,200
Total Variable Expenses (B)	1,776,000	1,332,000	444,000	1,398,600
Contribution (A-B)	1,584,000	1,188,000	396,000	1,247,400
Less: Fixed Costs - Traceable
Selling & Admn. Exp. - $220,000 + $67,000	490,000	220000	270000	220,000
Total Fixed Costs	490,000	220,000	270,000	220,000
Region Wise Profit	1,094,000	968,000	126,000	1,027,400
Non Traceable Fixed Epenses
Selling & Admn Exp.	67,000			67,000
MOH	1,060,000			1,060,000
Total non Traceable expense	1,127,000			1,127,000
Net Income	(33,000)			(99,600)
Decrease in Net income				66,600
The Net loss will increased to $99,600 from $33,000 in Year 2 if West region is dropped.