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.

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?

Answer 1

1
Direct materials	23
Direct labor	16
Variable manufacturing overhead	2
Unit product cost under variable costing	41
2
Direct materials	23
Direct labor	16
Variable manufacturing overhead	2
Fixed manufacturing overhead	17	=748000/44000
Unit product cost under absorption costing	58
3
Sales	2847000	=39000*73
Less: Variable expenses
Variable cost of goods sold	1599000	=39000*41
Variable selling and administrative expense	156000	=39000*4
Total Variable expenses	1755000
Total contribution margin under variable costing	1092000
4
Total contribution margin under variable costing	1092000
Less: Fixed expenses
Fixed manufacturing overhead	748000
Fixed selling and administrative expense	400000
Total fixed expenses	1148000
Net operating income (loss) under variable costing	-56000
5
Sales	2847000	=39000*73
Less: Cost of goods sold	2262000	=39000*58
Total gross margin under absorption costing	585000
6
Total gross margin under absorption costing	585000
Less: Selling and administrative expense	556000	=400000+(39000*4)
Net operating income (loss) under absorption costing	29000