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Diego Company manufactures one product that is sold for $76 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 47,000 units and sold 42,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	26
Direct labor	$	10
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	987,000
Fixed selling and administrative expense	$	475,000

The company sold 32,000 units in the East region and 10,000 units in the West region. It determined that $210,000 of its fixed selling and administrative expense is traceable to the West region, $160,000 is traceable to the East region, and the remaining $105,000 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.

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

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

b. Is it above or below the actual unit sales?

• Below

• Above

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 42,000 units? You do not need to perform any calculations to answer this question.

13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.

Answer 1

7)

The difference amount between variable and absorption costing system net operating profit (losses) is the amount of Fixed manufacturing overhead costs deferred in ending inventory under absorption costing.

Ending Inventory = Units Produced 47,000 - Units sold 42,000 = 5,000 Units

Fixed Manufacturing Overheads allocated per unit = Total Fixed Manufacturing Overheads $987,000 / Units Produced 47,000

= $21 per unit

Difference between operating profit = Ending Inventory 5,000 Units * Allocated Per Unit Fixed Manufacturing Overhead cost $21

= $105,000

8a – Company’s Break Even Point in Unit sales

First of all we need to calculated sales mix ratio between East and West region.

Regions	Units	Sales Mix Ratio
East Regions	32,000	76.1905%
West Regions	10,000	23.8095%
Total Sales	42,000	100.0000%

	East Region	West Region
Unit Selling Price	$76.00	$76.00
Less: Variable Costs (26+10+2+4)	$42.00	$42.00
Contribution Margin per unit	$34.00	$34.00
x Sales Mix Ratio (Refer Note 1)	76.1905%	23.8095%
	$25.9048	$8.0952
Weighted Avg Contribution Margin per unit (7.06 + 9.02)	$34.0000
Total Fixed Costs	$987,000
Composite Break Even Units for the company (Total Fixed Cost / Weighted Avf CM per unit)	29,029 Units

Company’s Break Even Point in Unit Sales = 29,029 Units

8b – It is below the actual unit sales

9) If the sales volumes in the East and West regions had been reversed, company’s overall break-even point in unit sales

Company’s overall break even point will remain sale as 29,029 Units because this is overall company’s break even point.

It will effect on individual region break even point but question is not asking for the same.

10) Company’s variable costing net operating income (loss) if it had produced and sold 42,000 units.

Net Operating Income/(Loss) = ($34,000) Loss

Contribution Margin (34 * 42,000 Units)	$1,428,000
Less: Total Fixed Costs (987,000 + 475,000)	$1,462,000
Net Operating Profit (loss)	-$34,000

13)

Diego Company Contribution Format Segmented Income Statement
	Total Company	East Region	West Region
Sales Revenue (Per Unit 76)	$3,192,000	$2,432,000	$760,000
Variable expenses (Per Unit $42)	$1,764,000	$1,344,000	$420,000
Contribution Margin	$1,428,000	$1,088,000	$340,000
Total Traceable fixed expenses	$370,000	$160,000	$210,000
Segment Margin / (loss)	$1,058,000	$928,000	$130,000
Non traceable Fixed Expenses (Manufacturing + Balance selling and admin) (Manufacturing 987000 + S&A 475000 – Traceable S&A 370000)	$1,092,000
Net Operating Income / (loss)	-$34,000

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