Question

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.

5. What is the company’s total gross margin under absorption costing?

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

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

8. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.

Answer 1

The fixed manufacturing overhead is absorbed as product cost under absorption costing while it is charged as a period cost under variable costing

Gross Margin under absorption costing = Sales – Cost of goods sold

= (79-29-16-2-800,000/50,000)*45000

= $720,000

6.Net Operating Income = Gross Margin – Selling and Administrative expenses

= 720,000 – 4*45000 – 516000

= $24,000

7.

Difference between income = Difference in units Produced and sold*Fixed manufacturing overhead per unit
=5000*(800,000/50000)
i.e.	80000
Contribution format Income Statement
	Total Company	East	West
Sales Revenue	3,555,000	2,765,000	790,000
Less: Variable costs	2,295,000	1,785,000	510,000
Contribution Margin	1,260,000	980,000	280,000
Less: Traceable Fixed costs	430,000	190,000	240,000
Segment Margin	830,000	790,000	40,000
Less: Common Fixed costs	886,000
Operating Income	-56,000