Question

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 $80,000 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 3% 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?

Diego Company manufactures one product that is sold for $79 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 50,000 units and sold 45,000 units. vu Variable costs per unit: Manufacturing: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense ON $ 800,000 $ 516,000 The company sold 35,000 units in the East region and 10,000 units in the West region. It determined that $240,000 of its fixed selling and administrative expense is traceable to the West region, $190,000 is traceable to the East region, and the remaining $86,000 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.

15. Assume the West region invests $40,000 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

Selling price	79
Less: Variable expense per unit	51	=29+16+2+4
Contribution margin per unit	28
14
Contribution margin lost of West division	-280000	=10000*28
Contribution margin increase of East division	29400	=35000*3%*28
Avoidable fixed expenses	240000
Change in profits	-10600
Profits will decrease by 10600
15
Contribution margin increase of West division	56000	=10000*20%*28
Less: Advertising costs	-40000
Change in profits	16000
Profits will increase by 16000