Question

Diego Company manufactures one product that is sold for $80 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 51,000 units and sold 47,000 units. Variable costs per unit: Manufacturing: Direct materials $ 30 Direct labor $ 18 Variable manufacturing overhead $ 2 Variable selling and administrative $ 3 Fixed costs per year: Fixed manufacturing overhead $ 816,000 Fixed selling and administrative expenses $ 480,000 The company sold 34,000 units in the East region and 13,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expenses is traceable to the West region, $200,000 is traceable to the East region, and the remaining $30,000 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. 15. Assume the West region invests $41,000 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

• All working forms part of the answer
• Calculation of current Income

	East Region	West Region
Sale price per unit	$80	$80
variable cost per unit:
Direct materials	$30	$30
Direct Labor	$18	$18
manufacturing Overhead	$2	$2
Selling & Admin	$3	$3
Total variable cost per unit	$53	$53
Contribution margin per unit	$27	$27
Units sold	34000	13000
Total Contribution margin	$918000	$351000
Traceable fixed Selling & Administrative	$200000	$250000
Net Income	$718000	$101000

Total Net Income [718000 +101000]	$819000
Common Fixed selling & admin expense	$30000
Fixed manufacturing overhead	$816000
Net Income/(Loss) of Company	$(27000)

• Calculation of Net Income after advertising campaign

	East Region	West Region
Sale price per unit	$80	$80
variable cost per unit:
Direct materials	$30	$30
Direct Labor	$18	$18
manufacturing Overhead	$2	$2
Selling & Admin	$3	$3
Total variable cost per unit	$53	$53
Contribution margin per unit	$27	$27
Units sold	34000	15600
Total Contribution margin	$918000	$421200
Traceable fixed Selling & Administrative	200000	$291000
Net Income	$718000	$130200

Total Net Income [718000 + 130200]	$848200
Common Fixed selling & admin expense	$30000
Fixed manufacturing overhead	$816000
Net Income/(Loss) of Company	$2200

• Earlier there was a Net Loss of $27000, and after advertising campaign, there will a net income of $2200. Hence, the cost incurred on advertising campaign will lead to an increase in Net Income of $29,200.