Question

I have Two Problems which are both solved below. My question is what makes the approach of solving in each one not the same. Why does one calculation include avoidable traceable cost while the other doesn't?

Diego Company manufactures one product that is sold for $80 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 40,000 units and sold 35,000 units. 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....... $24 $14 $2 $4 $800,000 $496,000 The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expense is traceable to the West region, $150.000 is traceable to the East region, and the remaining $96.000 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 Required: Answer each question independently based on the original data unless instructed otherwise. You do not need to prepare a segmented income statement until question 13

2nd Problem:

(2400000)= segment margin lost
1800000=savings in traceable fix cost due to discontinuation of beta
765000=Additional contribution margin

*West Region has Traceable costs that should be avoidable according to segment statement

so again why for the Diego company problem, 250000 in avoidable Traceable Fix Cost not calculated in answer?

Answer 1

If we carefully observe the calculations made in the two examples, we will find that although the two examples appear the same, there is a minor difference.

The difference is the costing method used.

In the first example, the method used is the Variable Costing Method and in the second example the method used is Absorption Costing Method.

In the first example( the Variable Costing Method), the actual traceable fixed cost of $ 250,000 is expressly provided in the question.

However, in the second example ( the Absorption Costing Method), we have been provided the traceable fixed cost per unit which is based on the annual production capacity( 100,000 units).The total traceable fixed costs would be $ 1,800,000

The actual production( 60,000 units) which would be discontinued is lesser than the annual capacity. Hence, all the other variable costs avoided would be calculated on the basis of 60,000 units whereas traceable fixed costs would be calculated on the basis of 100,000 units.

The change in approach is just to highlight this point.