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The Foundational 15

Available with McGraw-Hills Connect Accounting.

LO61, LO62,LO63, LO64

Diego Company manufactures one product that is sold for $80 per unit in two geographic regionsthe East and West regions. The following information pertains to the companys first year of operations in which it produced 40,000 units and sold 35,000 units.

d

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 expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96,000 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.

Page 262

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.

What is the unit product cost under variable costing?

What is the unit product cost under absorption costing?

What is the companys total contribution margin under variable costing?

What is the companys net operating income under variable costing?

What is the companys total gross margin under absorption costing?

What is the companys net operating income under absorption costing?

What is the amount of the difference between the variable costing and absorption costing net operating incomes? What is the cause of this difference?

What is the companys break-even point in unit sales? Is it above or below the actual sales volume? Compare the break-even sales volume to your answer for question 6 and comment.

If the sales volumes in the East and West regions had been reversed, what would be the companys overall break-even point in unit sales?

What would have been the companys variable costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question.

What would have been the companys absorption costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question.

If the company produces 5,000 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? Why? No calculations are necessary.

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

Diego is considering eliminating the West region because an internally generated report suggests the regions total gross margin in the first year of operations was $50,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East regions 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?

Assume the West region invests $30,000 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?

The Foundational 15

Available with McGraw-Hills Connect Accounting.

LO61, LO62,LO63, LO64

Diego Company manufactures one product that is sold for $80 per unit in two geographic regionsthe East and West regions. The following information pertains to the companys first year of operations in which it produced 40,000 units and sold 35,000 units.

d

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 expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96,000 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.

Page 262

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.

1. What is the unit product cost under variable costing?

2. What is the unit product cost under absorption costing?

3. What is the companys total contribution margin under variable costing?

4. What is the companys net operating income under variable costing?

5. What is the companys total gross margin under absorption costing?

6. What is the companys net operating income under absorption costing?

7. What is the amount of the difference between the variable costing and absorption costing net operating incomes? What is the cause of this difference?

8. What is the companys break-even point in unit sales? Is it above or below the actual sales volume? Compare the break-even sales volume to your answer for question 6 and comment.

9. If the sales volumes in the East and West regions had been reversed, what would be the companys overall break-even point in unit sales?

10. What would have been the companys variable costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question.

11. What would have been the companys absorption costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question.

12. If the company produces 5,000 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? Why? No calculations are necessary.

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 regions total gross margin in the first year of operations was $50,000 less than its traceable fixed selling and administrative expenses. Diego believes that if it drops the West region, the East regions 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 $30,000 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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