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 $70 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 53,000 units and sold 48,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	21
Direct labor	$	10
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	1,060,000
Fixed selling and administrative expense	$	557,000

The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expense is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 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 6-14

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 $66,000 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?

Answer 1

Contribution format income statement
Particulars	Continue West Region	Dropping West Region	Difference
Sales	3360000	2646000	(714,000)
Less: Variable cost
Direct Material	1008000	793800	(214,200)
Direct Labour	480000	378000	(102,000)
Variable manufacturing overhead	96000	75600	(20,400)
Variable selling and administrative	192000	151200	(40,800)
Contribution MARGIN	1584000	1247400	(336,600)
Less: Fixed Cost
Fixed manufacturing overhead	1060000	1060000	-
Fixed selling and administrative expense	557000	287000	(270,000)
Net Profit	-33000	-99600	(66,600)
Dropping western region will increase net loss by $66600/-