Question

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 expense	$	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 expense is traceable to the West region, $150,000 is traceable to the East region, and the remaining $38,000 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.

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

6b.What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

6c. What is the company’s break-even point in unit sales?

6d. . 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?

6e. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 42,000 units? You do not need to perform any calculations to answer this question.

Answer 1

a) Company’s net operating income (loss) under absorption costing:

Sales (42,000 units * $75 per unit)	3,150,000
COGS (42,000 units * $61 per unit)	2,562,000
Gross margin	588,000
Selling and admin expenses (42,000 units * $4 per unit)	556,000
Net operating income	32,000

　

b) Difference between the absorption and variable costing net operating incomes is computed as below:

Manufacturing overhead deferred in inventory (released from) = Fixed manufacturing overhead (Ending inventory) - Fixed manufacturing overhead (Beginning inventory) = ($4,000 per unit *14 units) - $0 = 56,000

　

c) Company’s break-even point in unit sales

Profit = Unit CM * Q - Fixed expenses

$0 = ($75-$51) * Q - $1,032,000

$24Q = $1,032,000

Q = 43,000 units

　

d) When the sales volumes in the East and West regions are reversed, the overall break-even point in unit sales in the company is would remain the same becase the CM per unit remains same regardless of whether a unit is sold in the East or West region. Moreover the fixed cost also remains constant thus the break-even point stays at 43,000 units

　

e)

Income statement
Sales		3,150,000
Variable expenses
Variable COGS (42,000 units × $47 per unit)	1,974,000
Variable selling and admin expenses 42,000 units × $4 per unit	168,000	2,142,000
		1,008,000
Contribution margin
Fixed expenses
Fixed manufacturing OH	644,000
Fixed selling and admin expenses	388,000	1,032,000
Net operating loss		-24,000