Diego Company manufactures one product that is sold for $78 per unit in two geographic regions-East and West. The following information pertains to the company's first year of operations in which it produced 60,000 units and sold 57,000 units. Variable costs per unit: Manufacturing: Direct materials Direct labor $28 $12 $2 $3 Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead $1,260,000 Fixed selling and administrative expense $ 654,000 The company sold 42,000 units in the East region and 15,000 units in the West region. It determined $340,000 of its fixed selling and administrative expense is traceable to the West region, $290,000 is traceable to the East region, and the remaining $24,000 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. Questions: 8. What is the company's break-even point in unit sales? Is it above or below the actual unit sales? 9. If the sales volumes in the East and West regions had been reversed, what would be the company's overall break-even point in unit sales? 10. What would have been the company's variable costing net operating income (loss) if it had produced and sold 57,000 units?
Diego Company manufactures one product that is sold for $78 per unit in two geographic regions-East and West. The following information pertains to the company's first year of operations in which it produced 60,000 units and sold 57,000 units. Variable costs per unit: Manufacturing: Direct materials Direct labor $28 $12 $2 $3 Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead $1,260,000 Fixed selling and administrative expense $ 654,000 The company sold 42,000 units in the East region and 15,000 units in the West region. It determined $340,000 of its fixed selling and administrative expense is traceable to the West region, $290,000 is traceable to the East region, and the remaining $24,000 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. Questions: 8. What is the company's break-even point in unit sales? Is it above or below the actual unit sales? 9. If the sales volumes in the East and West regions had been reversed, what would be the company's overall break-even point in unit sales? 10. What would have been the company's variable costing net operating income (loss) if it had produced and sold 57,000 units?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Transcribed Image Text:Diego Company manufactures one product that is sold for $78 per unit in two geographic regions-East and West. The
following information pertains to the company's first year of operations in which it produced 60,000 units and sold 57,000
units.
Variable costs per unit:
Manufacturing:
Direct materials
Direct labor
$ 28
$12
$2
$3
Variable manufacturing overhead
Variable selling and administrative
Fixed costs per year:
Fixed manufacturing overhead
$ 1,260,000
Fixed selling and administrative expense $654,000
The company sold 42,000 units in the East region and 15,000 units in the West region. It determined $340,000 of its fixed
selling and administrative expense is traceable to the West region, $290,000 is traceable to the East region, and the
remaining $24,000 is a common fixed expense. The company will continue to incur the total amount of its fixed
manufacturing overhead costs as long it continues produce any a unt of its only product.
Questions:
8. What is the company's break-even point in unit sales?Is it above or below the actual unit sales?
9. If the sales volumes in the East and West regions had been reversed, what would be the company's overall break-even
point in unit sales?
10. What would have been the company's variable costing net operating income (loss) if it had produced and sold 57,000
units?
11. What would have been the company's absorption costing net operating income (loss) if it had produced and sold
57,000 units?
12. If the company produces 3,000 fewer units than it sells in its second year of operations, will absorption costing net
operating income be higher or lower than variable costing net operating income in Year 2?
13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and
West regions.
14. 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 $115,000 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?
15. Assume the West region invests $50,000 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?
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