Question

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

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 46,000 units and sold 42,000 units.

  

Variable costs per unit:
Manufacturing:
Direct materials	$	25
Direct labor	$	20
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	644,000
Fixed selling and administrative expenses	$	388,000

The company sold 31,000 units in the East region and 11,000 units in the West region. It determined that $200,000 of its fixed selling and administrative expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $38,000 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.

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 42,000 units?   

11) What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 42,000 units?

12) If the company produces 4,000 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 $46,000 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 $36,000 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

		East	West	Total
	Units sold	31000	11000	42000
	Fixed selling & Admin Exp	150000	200000	350000
	common fixed cost			38000
9)	Breakeven in units=Fixed Cost /Contribution Margin per unit	43000	=(644000+388000)/24
	Contribution margin per unit =Selling Price per unit-Variable cost per unit	24	=75-(25+20+2+4)
	Companies overall breakeven will remain the same since the selling price at both region is same and fixed cost incurred will remain same.
10)		Variable costing Income Statement
	Sales	3150000	=42000*75
	Less: Variable cost	2142000	=51*42000
	Contribution Margin	1008000
	Less:Fixed Cost	1032000	=644000+388000
	Net operating income/(loss)	-24000
11)		Variable costing Income Statement
	Sales	3150000
Less:	Manufacturing cost:
	Direct Material	1050000
	Direct Labour	840000
	Variable manufactuirng overhead	84000
	Fixed manufacturing overhead	644000
	Gross Profit	532000
	Less:Selling & Admin:
	Variable selling cost	168000	=4*42000
	Fixed Selling cost	388000
	Net operating income/(loss)	-24000	(588000-168000-388000)
	If units produced and sold are same both method whether variable or absorbtion gives the sae result.
12)	Lower
	Under absorbtion costing variable manufacturing cost plus proportionate fixed manufacturing cost is transferred to closing inventory cost. Whereas in case of varaible costing only variable manufacturing cost is transferred. So when we prepare the second year income statement cost of 4000 units carry forwarded from last yaer would be more in case of absorbtion costing which will result in lower profit in case of absorbtion costing in comparision to varaible costing