Question

! Required Information [The following information applies to the questions displayed below.] Diego Company manufactures one product that is sold for $77 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 59,000 units and sold 54,000 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 $ $ $ 27 10 2 3 $1,298,000 $ 662,000 The company sold 41,000 units in the East region and 13,000 units in the West region. It determined that $330,000 of Its fixed selling and administrative expense is traceable to the West region, $280,000 is traceable to the East region, and the remaining $52,000 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 $49,000 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 increase by

Answer 1

15.

Contribution margin per unit = Selling price - Variable cost per unit

Variable cost pet unit = Direct materials + Direct labor + Variable manufacturing overhead + Variable selling and administrative expenses

= $27 + $10 + $2 + $3

= $42

Contribution margin per unit = $77 - $42

= $35

Total contribution margin = Contribution margin per unit * Units sold

= $35 * 13,000

= $455,000

Increase in contribution margin = $455,000 * 20%

= $91,000

Increase in profit = Increase in contribution margin - additional advertising expenses

= $91,000 - $49,000

= $42,000

Profit will increase by $42,000.