Question

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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 57,000 units and sold 52,000 units.

  

Variable costs per unit:
Manufacturing:
Direct materials	$	25
Direct labor	$	18
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	627,000
Fixed selling and administrative expenses	$	645,000

  

The company sold 36,000 units in the East region and 16,000 units in the West region. It determined that $310,000 of its fixed selling and administrative expenses is traceable to the West region, $260,000 is traceable to the East region, and the remaining $75,000 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 12. If the company produces 5,000 fewer units than it selld 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? 13. Prepeare a contribution foramt segmented income statement that includes a total column and columns for the East and Weat regions. Total company East West . 14. Diego is considering eliminating the West region because an internally generated report suggests the regions total gross margin in the first year of operations was $22,000 less than its traceble fixed selling and adminstrative express. Diego believes that if it drops the West region, the East regions sales will grow by 5% in year 2. Using the contribution approach for analyzing segment profitability and assuming all else remains constant in year2, what would be the profit impact of dropping the West regoins in year 2? 15. Assume the West regions invest $47,000 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 ? By?

Answer 1

12.

Absorption costing income will be lower than variable costing income. The variable costing income statement will only include the fixed manufacturing overhead costs incurred during the second year of operations, whereas the absorption costing cost of goods sold will include all of the fixed manufacturing overhead costs incurred during the second year of operations plus some of the fixed manufacturing overhead costs that were deferred ininventory at the end of the prior year.

13.

14.

Contribution Lost because of Dropping west region is $74000

Contribution we are going to gain from East region is 5% i.e., $864000 * 5% = $43200

Dropping of West region will result in decrese in net operating income by $30800

15.

Additional Contribution Margin - Additional Adverting expense = Increase in PRofits

$384000 * 20% - $47000 = Increase in PRofits

$76800 - $47000 = Increase in PRofits

Increase in PRofits = $29800