Question

Diego Company manufactures one product that is sold for $72 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 43,000 units and sold 38,000 units. Variable costs per unit: Manufacturing: Direct materials $ 22 Direct labor $ 14 Variable manufacturing overhead $ 3 Variable selling and administrative $ 5 Fixed costs per year: Fixed manufacturing overhead $ 774,000 Fixed selling and administrative expenses $ 346,000 The company sold 28,000 units in the East region and 10,000 units in the West region. It determined that $170,000 of its fixed selling and administrative expenses is traceable to the West region, $120,000 is traceable to the East region, and the remaining $56,000 is a common fixed cost. 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. Required: 1. What is the unit product cost under variable costing? 2. What is the unit product cost under absorption costing? 3. What is the company’s total contribution margin under variable costing? 4. What is the company’s net operating income (loss) under variable costing? 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)? 8-1. What is the company’s break-even point in unit sales? 2. Is it above or below the actual sales volume? 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 38,000 units? 11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 38,000 units? 12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2? Lower Higher 13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions. 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 $20,000 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? 15. Assume the West region invests $33,000 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? ANSWERS 5-15 NEEDED PLEASE!!

Answer 1

In absorption costing the following items are taken to calculate the per unit cost. Which are as follows

• The direct material cost
• The direct labor cost
• The variable manufacturing overhead
• The fixed manufacturing overhead is taken

To calculate the per unit cost of fixed manufacturing overhead following formula is used

Per unit Cost of fixed manufacturing overhead = total fixed manufacturing overhead amount / total production in units for that period

In variable costing the following items are taken to calculate the per unit cost. Which are as follows

• The direct material cost
• The direct labor cost
• The variable manufacturing overhead

To answer question 5 onward following information is needed

The unit product cost under variable costing is calculated as below

Unit product cost per unit as per variable costing
particulars	Per unit cost($)
Direct material	22
Direct labor	14
Variable manufacturing overhead	3
Total per unit cost ($)	39

The unit product cost under absorption costing is calculated below

Unit product cost per unit as per Absorption costing
particulars	Amount	Total production	Per unit cost($)
	(A)	(B)	C=A/B
Direct material			22.00
Direct labor			14.00
Variable manufacturing overhead			3.00
Fixed manufacturing overhead	774000	43000	18.00
Total per unit cost ($)			57.00

The calculation of operating income (loss) under variable costing

Net operating income / (loss)as per variable costing
Particulars		per unit cost ($)	Quantity	Total amount($)
Sales revenue	A	72	38000	2736000
Variable expenses
variable cost of goods sold	B	39	38000	1482000
Variable selling and administrative	C	5	38000	190000
Total variable expenses	D=B+C	44		1672000
Contribution Margin	E=A-D	28		1064000
Fixed expenses
Fixed manufacturing overhead	F			774000
Fixed selling and administrative expenses	G			346,000
Total Fixed expenses	H=F+G			1,120,000
Net operating income/(LOSS)	I=E-H			-56,000

5. What is the company’s total gross margin under absorption costing?

To calculate the gross margin under absorption costing. The following formula can be used

Gross margin = Sales revenue – cost of goods sold

Where

Quantity of goods sold is 38,000 units

The sales per units is $72

The cost of goods per unit is $ 57 (calculated above in unit product cost under absorption costing)

The calculation in shown as under

Gross margin as per absorption costing
Particulars		per unit cost ($)	Quantity	Total amount($)
Sales revenue	A	72	38000	2736000
Cost of goods sold	B	57	38000	2166000
Gross margin	C=A-B	15		570000

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

The net operating income as per is calculated below

Net operating as per absorption costing
Particulars		per unit cost ($)	Quantity	Total amount($)
Sales revenue	A	72	38000	2736000
Cost of goods sold	B	57	38000	2166000
Gross margin	C=A-B	15		570000
Selling and administrative expenses
variable expenses	D	5.00	38000	190000
Fixed expenses	E			346,000
Total Selling and administrative expenses	F=D+E			536000
Net operating income/(LOSS)	G=C-F			34000

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

The net operating loss as per variable costing is $(56,000)

The net operating income as per absorption costing is $34,000

The difference is

= (56,000) – 34,000

= (90,000)

The difference is $90,000

8-1. what is the company’s break-even point in unit sales?

Break even is a point when there is no loss incurred or profit earned by the firms. It can be calculated in units and dollar value

The formula for calculation of break even in units is given below

BEP in units = total fixed cost / contribution per unit

Where

Total fixed cost = $ 1,120,000

Contribution per unit = $ 28 ( calculated in net operating loss statement as per variable costing above)

BEP = $1,120,000/28

= 40,000 units

The break even in units is 40,000 units

2. Is it above or below the actual sales volume?

The break even units as per variable costing are 40,000 units bur actual sales is 38,000. Therefore the actual sales volume is 2000 units below break even in units