Question

Diego Company manufactures one product that is sold for $73 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 44,000 units and sold 39,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	23
Direct labor	$	16
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	748,000
Fixed selling and administrative expense	$	400,000
The company sold 29,000 units in the East region and 10,000 units in the West region. It determined that $180,000 of its fixed selling and administrative expense is traceable to the West region, $130,000 is traceable to the East region, and the remaining $90,000 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?

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

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

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

Answer 1

Question 5

Calculation of Gross Margin under Absorption Costing

Particulars	Amount
Sales Revenue	28,47,000
Less: Cost of Goods Sold	22,62,000
Gross Margin	5,85,000

Notes

Sales Revenue = 39,000 Units * $ 73 per Unit = $ 28,47,000

Cost of Goods Sold = Units Sold * Unit Product Cost as per Absorption Costing

= 39,000 * $ 58 Per Unit

= $ 22,62,000

Particulars	Amount
Direct Materials Cost per Unit	23
Add: Direct Labour Cost per Unit	16
Add: Variable Manufacturing Overhead per Unit	2
Add: Fixed Manufacturing Overhead per Unit	17
Unit Product Cost	58

Fixed Manufacturing Overhead per Unit = Fixed Manufacturing Overhead / Units Produced

= 748,000 / 44,000

= $ 17 per Unit

Question 6

Net Operating Income / (Loss) as per Absorption Costing

Particular	Amount
Sales Revenue	28,47,000
Less: Cost of Goods Sold	(22,62,000)
Gross Profit	5,85,000
Less: Variable Selling and Administrative Expenses	(1,56,000)
Less: Fixed Selling and Administrative Expenses	(4,00,000)
Net Operating Income / (Loss)	29,000

Variable Selling and Administrative Expenses = Units Sold * Variable Selling and Administrative Expenses per Unit

= 39,000 * $ 4 per Unit

= $ 156,000

Question 7

Particulars	Amount
Net Operating Income (Loss) as per Variable Costing	(56,000)
Add: Fixed Costs Deferred in Year	85,000
Net Operating Income as per Absorption Costing	29,000

Difference is of $ 85,000 of Fixed Manufacturing Overhead Deferred between Absorption Costing and Variable Costing Income for the Year.
Net Operating Income as per Variable Costing = Net Income as per Absorption Costing - Fixed Manufacturing Overhead deferred

= 29,000 - 85,000

= ($ 56,000)

Fixed Manufacturing Overhead Deferred = Units in Ending Inventory * Fixed Manufacturing Overhead per Unit

= 5,000 * 17

= $ 85,000

Units in Ending Inventory = Units Produced - Units Sold

= 44,000 - 39,000

= 5,000

Question 8

Particulars	Amount
Direct Materials Cost per Unit	23
Add: Direct Labour Cost per Unit	16
Add: Variable Overhead per Unit	2
Add: Variable Selling and Administrative Expenses per Unit	4
Variable Costs per Unit	45

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

= 73 - 45

= $ 28 per Unit

Fixed Costs = Fixed Manufacturing Overhead + Fixed Selling and Administrative Expenses

= 400,000 + 748,000

= $ 11,48,000

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

= 11,48,000 / 28

= 41,000 Units