Question

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

Diego Company manufactures one product that is sold for $78 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 49,000 units and sold 44,000 units.

  

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	14
Variable manufacturing overhead	$	4
Variable selling and administrative	$	6
Fixed costs per year:
Fixed manufacturing overhead	$	686,000
Fixed selling and administrative expenses	$	510,000

  

The company sold 32,000 units in the East region and 12,000 units in the West region. It determined that $230,000 of its fixed selling and administrative expenses is traceable to the West region, $180,000 is traceable to the East region, and the remaining $100,000 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.

value:
0.66 points

Required information

Required:
1.	What is the unit product cost under variable costing?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

2.

value:
0.66 points

Required information

2.	What is the unit product cost under absorption costing?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

3.

value:
0.66 points

Required information

3.	What is the company’s total contribution margin under variable costing?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

4.

value:
0.66 points

Required information

4.	What is the company’s net operating income (loss) under variable costing?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

5.

value:
0.66 points

Required information

5.	What is the company’s total gross margin under absorption costing?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

6.

value:
0.66 points

Required information

6.	What is the company’s net operating income (loss) under absorption costing?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

7.

value:
0.66 points

Required information

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

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

8.

value:
0.66 points

Required information

1.	What is the company’s break-even point in unit sales?

  
   

  

2.	Is it above or below the actual sales volume?
	Below Above

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

9.

value:
0.66 points

Required information

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?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

10.

value:
0.66 points

Required information

10.	What would have been the company’s variable costing net operating income (loss) if it had produced and sold 44,000 units?

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

11.

value:
0.66 points

Required information

11.	What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 44,000 units?

  
      

rev: 07_07_2017_QC_CS-92071

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

12.

value:
0.66 points

Required information

12.	If the company produces 5,000 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?

       

	Higher
	Lower

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

13.

value:
0.66 points

Required information

13.	Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.

  
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

14.

value:
0.66 points

Required information

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 $14,000 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?

      
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

15.

value:
0.76 points

Required information

15.	Assume the West region invests $39,000 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?

    
      

References

eBook & Resources

WorksheetLearning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.

Difficulty: 2 MediumLearning Objective: 06-02 Prepare income statements using both variable and absorption costing.Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions.

Check my work

Answer 1

Answer 1.
Unit Product Cost
Under Variable Costing
Direct Material	28.00
Direct Labor	14.00
Variable Manufacturing Overhead	4.00
Total Product Cost	46.00
Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost in both absorption costing & variable costing.
Answer 2.
Unit Product Cost
Under Absorption Costing
Direct Material	28.00
Direct Labor	14.00
Variable Manufacturing Overhead	4.00
Fixed MOH - $686,000 / 49,000 Units	14.00
Total Product Cost	46.00
Answer 3.
	Total Company
Sales in Units	44,000
SP per Unit	78
Sales	3,432,000
Less: Varible Costs
Cost of Goods Sold - $46 X 44,000 Units	2,024,000
Selling & Admn. Expenses - $6 X 44,000 Units	264,000
Total Variable Costs	2,288,000
Contribution Margin	1,144,000
Answer 4.
Contribution Margin	1,144,000
Less: Fixed Costs
Fixed Manufacturing Overhead	686,000
Fixed Selling & Admn. Exp.	510,000
Total Fixed Costs	1,196,000
Net Operating Income (Loss)	(52,000)