Question

Required information

The Foundational 15 [LO6-1, LO6-2, LO6-3, LO6-4, LO6-5]

[The following information applies to the questions displayed below.]

Diego Company manufactures one product that is sold for $77 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 48,000 units and sold 43,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	27
Direct labor	$	12
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	864,000
Fixed selling and administrative expense	$	456,000

The company sold 33,000 units in the East region and 10,000 units in the West region. It determined that $220,000 of its fixed selling and administrative expense is traceable to the West region, $170,000 is traceable to the East region, and the remaining $66,000 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.

Foundational 6-9

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 43,000 units? You do not need to perform any calculations to answer this question.

11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 43,000 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.

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 $50,000 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 $38,000 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?

Answer 1

9.

Break-Even Point in Sales (Unit) = Fixed Costs/ Contribution Margin per unit

Fixed Cost = 864,000+456,000 = 1320,000

Contribution Margin = Sales price - Variable cost

= 77 - (27+12+3+5) = 30

Break-even point = 1320,000/ 30 = 44,000

10.

Net Operating Loss = $30,000

11.

Net Operating Profit = $60,000

13.

	Total	Geographic Regions
East	West
Sales	$          3,311,000	$        2,541,000	$        770,000
Variable Cost	$          2,021,000	$        1,551,000	$        470,000
Contribution Margin	$          1,290,000	$            990,000	$        300,000
Fixed Selling and Admin OH	$              390,000	$            170,000	$        220,000
Segment Margin	$              900,000	$            820,000	$          80,000
Common Fixed Selling & Admin OH	$                66,000
Common Fixed Manufacturing OH	$              864,000
Net Operating Income/Loss	$              (30,000)

14.

	Total
Sales	$          2,668,050
Variable Cost	$          1,628,550
Contribution Margin	$          1,039,500
Fixed Selling and Admin OH	$              236,000
Fixed Manufacturing OH	$              864,000
Net Operating Income/Loss	$              (60,500)

15.

	Total	Geographic Regions
East	West
Sales	$          3,465,000	$        2,541,000	$        924,000
Variable Cost	$          2,115,000	$        1,551,000	$        564,000
Contribution Margin	$          1,350,000	$            990,000	$        360,000
Fixed Selling and Distribution OH	$              390,000	$            170,000	$        220,000
Advertising campaign	$                38,000		$          38,000
Segment Margin	$              922,000	$            820,000	$        102,000
Common Fixed Selling & Distribution OH	$                66,000
Common Fixed Manufacturing OH	$              864,000
Net Operating Income/Loss	$                (8,000)

$22,000 Increase in profit of the West region. Still, the overall Net loss will be there with a reduction of $22,000.