Question

Diego Company manufactures one product that is sold for $76 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 47,000 units and sold 42,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	26
Direct labor	$	10
Variable manufacturing overhead	$	2
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	987,000
Fixed selling and administrative expenses	$	475,000

The company sold 32,000 units in the East region and 10,000 units in the West region. It determined that $210,000 of its fixed selling and administrative expenses is traceable to the West region, $160,000 is traceable to the East region, and the remaining $105,000 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. What is the company’s net operating income (loss) under absorption costing? What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)? What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 42,000 units? Assume the West region invests $37,000 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? Profit will increase or descrease? By _______

Answer 1