Question

Diego Company manufactures one product that is sold for $70 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 53,000 units and sold 48,000 units. Variable costs per unit: Manufacturing Direct materials 21 Direct labor 10 Variable manufacturing overhead Variable sel1ing and administrative Fixed costs per year Fixed manufacturing overhead Fixed selling and administrative expense $ 2 $ 4 $1,060,000 $ 557,000 The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expense is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 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. Foundational 6-6 6. What is the company's net operating income (loss) under absorption costing?

Answer 1

6. Determine the company's net operating income (loss) under absorption costing as shown below Absorption Costing Income Statement Sales [a= 48.000 units x $70] Cost of goods sold: Beginning inventory [b] Cost of goods manufactured [e Note 1] Ending inventory [d Note - 2] Cost of goods sold [e b+c-d Gross margin [f= a el Selling and administrative expenses [g] [(48,000 units x $4 per unit)+ $557,000] Net operating income/(loss) [f-g $3.360.000 $0 $2.809,000 $265.000 - $2.544.000 $816,000 $749.000 $67,000 Thus, the amount of net operating income under absorption costing is $67,000.

Note-1: Determine the amount of cost of goods manufactured under absorption costing as shown below: Details Amount Direct materials per unit [a] Direct labor per unit [b] Variable manufacturing overhead [c] Total variable manufacturing costs per unit [d= a +b + e] Variable manufacturing costs [e dx 53.000 units] Fixed manufacturing overhead [f] Total manufacturing costs [e + f 21 10 2 33 $1,749,000 $1.060,000 $2,809,000 Note-2: Determine the amount of ending inventory under absorption costing as shown below Number of units produced [a] Number of units sold [b] Number of units of ending inventory [e = a - b] Total manufacturing costs [d] Ending inventory value as per absorption costing [d x (c + a)] 53,000 48.000 5.000 $2,809,000 $265,000

7. Determine the amount of difference between the variable costing and absorption costing net operating income (losses) as shown below: Difference of Variable Costing and Absorption Costing Net Operating Income (Losses) Variable costing net operating income (loss) Note - 3] Add: Difference in valuation of ending inventory [$265,000- $165,000] Absorption costing net operating income (loss) (S33.000) $100.000 $67,000 Note-3: Determine the company's net operating income (loss) under variable costing as shown below Variable Costing Income Statement Sales [a = 48.000 units x $70] Variable cost of goods sold: Beginning inventory [b] Variable cost of goods manufactured [c Note Ending inventory [d = Note - 5] Variable cost of goods sold [e b +c -d Manufacturing margin [f= a-e] Variable selling and administrative expenses [g] (48,000 units x $4 per unit) Contribution margin [h= f- g] Fixed costs: Fixed manufacturing costs [i] Fixed selling and administrative expenses i] Total fixed costs [ki +j Net operating income/(loss) [h - k] $3,360,000 $0 $1,749,000 $165.000 4] $1.584.000 $1,776,000 $192.000 $1,584.000 $1,060,000 $557.000 $1,617,000 (S33,000)

Note-4: Determine the amount of variable cost of goods manufactured as shown below Details Amount Direct materials per unit [a] Direct labor per unit [b] Variable manufacturing overhead [c] Total variable manufacturing costs per unit [d a+b+c] Variable cost of goods manufactured [d x 53,000 units] 21 10 21 33 $1,749,000 Note-5: Determine the amount of ending inventory under variable costing as shown below: Number of units produced [a] Number of units sold [b] Number of units of ending inventory [e a -b] Variable cost of goods manufactured [d] Ending inventory value as per variable costing [d x (e a) 53,000 48,000 5.000 $1,749,000 $165,000