Question

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Diego Company manufactures one product that is sold for $75 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 57,000 units and sold 52,000 units.

  

Variable costs per unit:
Manufacturing:
Direct materials	$	25
Direct labor	$	18
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	627,000
Fixed selling and administrative expenses	$	645,000

  

The company sold 36,000 units in the East region and 16,000 units in the West region. It determined that $310,000 of its fixed selling and administrative expenses is traceable to the West region, $260,000 is traceable to the East region, and the remaining $75,000 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. 8 a. What is the company's break-even point in unit sales? 8 b. Is it above or below the actual slaes 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 the unit sales? 10. What would have been the company's variable costing net operating income (loss) if it had produced and sold 52,000 units? 11. What would have been the company's absorption costing net operating income (loss) if it had produced and sold 52,000 units?

Answer 1

8a. Break Even Point in Unit Sales = Fixed Cost / Contribution Margin

Break Even Point in Unit Sales = ($627000 + $645000) / ($75 - $51)

Break Even Point in Unit Sales = $1272000 / $24

Break Even Point in Unit Sales = 53000 Units

8b. Break Even Point is Greater than the Actual Sales volume

9. The breakeven point of 53,000 units would remain the same. This occurs because the contribution margin per unit is the same regardless of whether a unit is sold in the East or West region. The total fixed cost also remains unchanged so the break-even point stays at 53,000 units

10. Variable costing Net Operating Loss = Contribution Margin - Fixed Cost

Variable costing Net Operating Loss = Sales * $21 - Fixed Cost

Variable costing Net Operating Loss = 52000 * $21 - $1272000

Variable costing Net Operating Loss = 52000 * $21 - $1272000

Variable costing Net Operating Loss = ($180000)

11. Absorption costing Net Operating Loss = Contribution Margin - Fixed Cost

Absorption costing Net Operating Loss = Sales * $21 - Fixed Cost

Absorption costing Net Operating Loss = 52000 * $21 - $1272000

Absorption costing Net Operating Loss = 52000 * $21 - $1272000

Absorption costing Net Operating Loss = ($180000)

When the number of units produced equals the number of units sold,absorption costing net operating income equals the variable costing netoperating income. Therefore, absorption costing net operating loss would be $180,000