Question

Required information [The following information applies to the questions displayed below.] Diego Company manufactures one product that is sold for $79 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 50,000 units and sold 45,000 units. Variable costs per unit: Manufacturing: Direct materials $ 29 Direct labor $ 16 Variable manufacturing overhead $ 2 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 800,000 Fixed selling and administrative expense $ 516,000 The company sold 35,000 units in the East region and 10,000 units in the West region. It determined that $240,000 of its fixed selling and administrative expense is traceable to the West region, $190,000 is traceable to the East region, and the remaining $86,000 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 $80,000 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 3% 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

Direct materials	$                  29
Direct labor	$                  16
Variable manufacturing overhead	$                     2
Variable selling and administrative	$                     4
Unit Variable Cost	$                  51
Unit Selling price	$                  79
Less: Unit Variable Cost	$                  51
Unit contribution margin	$                  28
Contribution margin lost by West region if eliminating the West region (10000*28)	$        280,000
Less: traceable fixed selling and administrative expense to the West region	$        190,000
Segment margin forgone or lost if eliminating the West region	$          90,000
Increase in units if it drops the West region (35000*3%)	1,050
Additional contribution margin by East region (1050*28)	$          29,400
Segment margin forgone or lost if eliminating the West region	$        (90,000)
Additional contribution margin by East region	$          29,400
Decrease in profits if drops the West region	$        (60,600)
Profit will be decreased by $60,600