Question

Diego Company manufactures one product that is sold for $71 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 54,000 units and sold 49,000 units.

Variable costs per unit:
Manufacturing:
Direct materials	$	22
Direct labor	$	12
Variable manufacturing overhead	$	3
Variable selling and administrative	$	5
Fixed costs per year:
Fixed manufacturing overhead	$	864,000
Fixed selling and administrative expenses	$	586,000

The company sold 36,000 units in the East region and 13,000 units in the West region. It determined that $280,000 of its fixed selling and administrative expenses is traceable to the West region, $230,000 is traceable to the East region, and the remaining $76,000 is a common fixed cost. 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.   

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

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

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

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

5.) 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 $46,000 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 5% 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?

6.)  Assume the West region invests $44,000 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

as per HomeworkLib policy please find ans of first 4 question.. for rest of q please raise new request..

ans 1	Net operating income
	computation of unit costs
		Unit cost
	Direct materials	22
	Direct labor	12
	Variable manufacturing overhead	3
	Unit product cost	37
	Unit sold	49000
		Year 1
	Sales (@ $71 per unit)	3,479,000
	Less : Variable cost of production @ 37 per unit	1,813,000
	Less : Variable selling and administrative cost @ 5 per unit	245,000
	Total variable expenses	2,058,000
	Contribution margin	1,421,000
	Less : Fixed cost
	fixed manufacturing expenses	864000
	Fixed selling and administrative expense	586000
	Total fixed cost	1450000
	Net operating income	-29,000
	therefore loss = -29000
ans 2	What is the company’s total gross margin under absorption costing?
		Year -1
	Unit produced	54000
	Variable cost per unit	37
	Total variable cost of production	1998000
	Fixed cost of production	864000
	Total cost of production	2862000
	Per unit cost	53.00
	Computation of gross margin
	Sales =49000*71	3479000
	Less : Cost of goods sold = 49000*53	2597000
	Gross margin	882000
Ans 3	What is the company’s net operating income (loss) under absorption costing?
	Unit sold	49000
		Year 1
	Sales =49000*71	3479000
	Less : Cost of goods sold	2,597,000
	Gross margin	882,000
	Less : selling and manufacturing overhead
	fixed selling expenses	586000
	variable selling and manufacturing overhead	245,000
	Total cost	831000
	Net operating income	51,000
ans 4	What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
	Difference in income =
	=51000+29000=	80,000
	reason is due to higher valuation of Closing inventory
	Unit cost under variable cost is 37 while under Absorption costing it is 53
	Closing stock of 5000 unit under Absorption costing is carrying difference cost .
	=(53-37)*5000	80000

Answer 2

To answer these questions, we need to calculate the net operating income (loss) under both variable costing and absorption costing methods. Let's go step by step:

Step 1: Calculate the variable cost per unit. Variable cost per unit = Direct materials + Direct labor + Variable manufacturing overhead Variable cost per unit = $22 + $12 + $3 = $37

Step 2: Calculate the variable cost of goods sold for each region. Variable cost of goods sold (East region) = Variable cost per unit * Units sold in the East region Variable cost of goods sold (East region) = $37 * 36,000 = $1,332,000

Variable cost of goods sold (West region) = Variable cost per unit * Units sold in the West region Variable cost of goods sold (West region) = $37 * 13,000 = $481,000

Step 3: Calculate the variable selling and administrative expenses for each region. Variable selling and administrative expenses (East region) = Variable selling and administrative expenses per unit * Units sold in the East region Variable selling and administrative expenses (East region) = $5 * 36,000 = $180,000

Variable selling and administrative expenses (West region) = Variable selling and administrative expenses per unit * Units sold in the West region Variable selling and administrative expenses (West region) = $5 * 13,000 = $65,000

Step 4: Calculate the total variable cost of goods sold and total variable selling and administrative expenses for the company. Total variable cost of goods sold = Variable cost of goods sold (East region) + Variable cost of goods sold (West region) Total variable cost of goods sold = $1,332,000 + $481,000 = $1,813,000

Total variable selling and administrative expenses = Variable selling and administrative expenses (East region) + Variable selling and administrative expenses (West region) Total variable selling and administrative expenses = $180,000 + $65,000 = $245,000

Step 5: Calculate the contribution margin for each region. Contribution margin (East region) = Sales revenue (East region) - Total variable cost of goods sold - Variable selling and administrative expenses (East region) Contribution margin (East region) = ($71 * 36,000) - $1,332,000 - $180,000 = $534,000

Contribution margin (West region) = Sales revenue (West region) - Variable cost of goods sold (West region) - Variable selling and administrative expenses (West region) Contribution margin (West region) = ($71 * 13,000) - $481,000 - $65,000 = $208,000

Step 6: Calculate the company's net operating income under variable costing. Net operating income (Variable costing) = Contribution margin (East region) + Contribution margin (West region) - Common fixed expenses Net operating income (Variable costing) = $534,000 + $208,000 - $76,000 = $666,000

Now let's proceed to answer the other questions.