Question

Diego Company manufactures one product that is sold for $78 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 60,000 units and sold 57,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	12
Variable manufacturing overhead	$	2
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	1,260,000
Fixed selling and administrative expense	$	654,000

The company sold 42,000 units in the East region and 15,000 units in the West region. It determined that $340,000 of its fixed selling and administrative expense is traceable to the West region, $290,000 is traceable to the East region, and the remaining $24,000 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.

15. Assume the West region invests $50,000 in a new advertising campaign in Year 2 that increases its unit sales by 20%. If all else remains constant, what would be the profit impact of pursuing the advertising campaign?

	Profit will by

Answer 1

• All working forms part of the answer itself.
• Amounts are in $
• Note: Variable costs are calculated by Multiplying Variable costs per unit by No of units sold
• Working: Current Year 1 situation

	East Region	West Region	Total
Units sold	42000	15000	57000
Sales Revenue $	3276000	1170000	4446000
Less: Variable costs
Direct material $	1176000	420000	1596000
Direct labor $	504000	180000	684000
Variable Manufacturing Overhead $	84000	30000	114000
variable Selling & Administrative Overhead $	126000	45000	171000
Contribution Margin	1386000	495000	1881000
Less: Traceable Fixed Selling & Administrative Cost $	290000	340000	630000
Net Income before other fixed cost $	1096000	155000	1251000
Less: Other fixed cost
Fixed manufacturing overhead $			1260000
Fixed Selling & Administrative cost(Common) $			24000
Net Income/(Loss) $			(33000)

• Year 2 prospects

	East Region	West Region	Total
Units sold	42000	[15000 + 20%] 18000	60000
Sales Revenue $	3276000	1404000	4680000
Less: Variable costs
Direct material $	1176000	504000	1680000
Direct labor $	504000	216000	720000
Variable Manufacturing Overhead $	84000	36000	120000
variable Selling & Administrative Overhead $	126000	54000	180000
Contribution Margin $	1386000	594000	1980000
Less: Traceable Fixed Selling & Administrative Cost $	290000	[340000 + 50000 of advertising] 390000	680000
Net Income before other fixed cost $	1096000	204000	1300000
Less: Other fixed cost
Fixed manufacturing overhead $			1260000
Fixed Selling & Administrative cost(Common) $			24000
Net Income/(Loss) $			16000

• Now the Net Income is $16000, earlier it was $(33000).
• Hence, the Net Income is INCREASED by $49,000