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 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.

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?

7) What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?  

8a) What is the company’s break-even point in unit sales?

8b) Is it above or below the actual sales volume?

Answer 1

Answer to Part 1.

Unit Product Cost as per Variable Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost as per Variable Costing = $25 + $20 + $2
Unit Product Cost as per Variable Costing = $47

Answer to Part 2.

Unit Product Cost as per Absorption Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Fixed Manufacturing Overhead = 644,000 / 46,000
Fixed Manufacturing Overhead = $14

Unit Product Cost as per Absorption Costing = $25 + $20 + $2 + $14
Unit Product Cost as per Absorption Costing = $61

Answer to Part 3.

Contribution Margin = Sales – Variable Expenses
Variable Expenses = Variable Cost of Goods Sold + Variable Selling and Administrative Expenses
Variable Expenses = ($47 * 42,000) + ($4 * 42,000)
Variable Expenses = $1,974,000 + $168,000
Variable Expenses = $2,142,000

Sales = 42,000 * $75
Sales = $3,150,000

Contribution Margin = $3,150,000 - $2,142,000
Contribution Margin = $1,008,000