Question

In: Accounting

Diego Company manufactures one product that is sold for $77 per unit in two geographic regions—the...

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 59,000 units and sold 54,000 units.

Variable costs per unit:
Manufacturing:
Direct materials $ 27
Direct labor $ 10
Variable manufacturing overhead $ 2
Variable selling and administrative $ 3
Fixed costs per year:
Fixed manufacturing overhead $ 1,298,000
Fixed selling and administrative expense $ 662,000

The company sold 41,000 units in the East region and 13,000 units in the West region. It determined that $330,000 of its fixed selling and administrative expense is traceable to the West region, $280,000 is traceable to the East region, and the remaining $52,000 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.

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 $122,000 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 $49,000 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?

Solutions

Expert Solution

Selling price per unit 77
Less: Variable expense
Direct materials 27
Direct labor 10
Variable manufacturing overhead 2
Variable selling and administrative 3
Total Variable expense 42
Contribution margin per unit 35
13
Total company East West
Sales 4158000 3157000 1001000
Variable costs 2268000 1722000 546000
Contribution margin 1890000 1435000 455000
Traceable fixed expenses 610000 280000 330000
Regional segment margin 1280000 1155000 125000
Common fixed expenses not traceable to regions 1350000
Net Operating loss (70000)
14
Loss in Contribution margin of West -455000 =13000*35
Increase in Contribution margin of East 71750 =41000*5%*35
Avoidable fixed selling and administrative expense 330000
Net change in Profits -53250
Profits will decrease by 53250
15
Increase in unit sales 2600 =13000*20%
X Contribution margin per unit 35
Increase in Contribution margin 91000
Less: Advertising costs -49000
Net change in Profits 42000
Profits will increase by 42000

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