Problem 1- Diego Company manufactures one product that is sold for $72 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 55,000 units and sold 50,000 units.
Variable costs per unit:
Manufacturing:
Direct materials $23
Direct labor $14
Variable manufacturing overhead $3
Variable selling and administrative $5
Fixed costs per year:
Fixed manufacturing overhead $770,000
Fixed selling and administrative expenses $607,000
The company sold 37,000 units in the East region and 13,000 units in the West region. It determined that $290,000 of its fixed selling and administrative expenses is traceable to the West region, $240,000 is traceable to the East region, and the remaining $77,000 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.
Required:
1. What is the unit product cost under variable costing?
2. What is the unit product cost under absorption costing?
3. What is the company's total contribution margin under variable costing?
4. What is the company's net operating income (loss) under variable costing?
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. i. What is the company's breakeven point in unit sales?
ii. Is it above or below the actual sales volume?
9. If the sales volumes in the East and West regions had been reversed, what would be the company's overall breakeven point in unit sales?
10. What would have been the company's variable costing net operating income (loss) if it had produced and sold 50,000 units?
11. What would have been the company's absorption costing net operating income (loss) if it had produced and sold 50,000 units?
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?
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 $56,000 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 $45,000 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?
Problme 2 - Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data:
|
Year 1 |
Year 2 |
Year 3 |
| Inventories: |
|
|
|
| Beginning (units) |
203 |
155 |
196 |
| Ending (units) |
155 |
196 |
235 |
| Variable costing net operating income |
$300,000 |
$278,100 |
$253,600 |
The company's fixed manufacturing overhead per unit was constant at $568 for all three years.
Required:
1. Determine each year's absorption costing net operating income.
| Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes |
|
Year 1 |
Year 2 |
Year 3 |
| Variable costing net operating income |
|
|
|
| Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing |
|
|
|
| Absorption costing net operating income |
|
|
|
2. In Year 4, the company's variable costing net operating income was $246,200 and its absorption costing net operating income was $267,100.
a. Did inventories increase or decrease during Year 4?
b. How much fixed manufacturing overhead cost was deferred in or released from inventory during Year 4?
Problem 3 - Chuck Wagon Grills, Inc., makes a single product-a handmade specialty barbecue grill that it sells for $300. Data for last year's operations follow:
| Units in beginning inventory |
0 |
| Units produced |
10,400 |
| Units sold |
8,400 |
| Units in ending inventory |
2,000 |
| Variable costs per unit: |
|
| Direct materials |
$60 |
| Direct labor |
40 |
| Variable manufacturing overhead |
10 |
| Variable selling and administrative |
30 |
| Total variable cost per unit |
$140 |
| Fixed costs: |
|
| Fixed manufacturing overhead |
$180,000 |
| Fixed selling and administrative |
620,000 |
| Total fixed costs |
$800,000 |
Required:
1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.
2. Assume that the company uses variable costing. Prepare a contribution format income statement for the year.
|
Chuck Wagon Grills, Inc.
|
|
Variable Costing Income Statement
|
|
|
|
|
|
Variable expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Fixed expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
3. What is the company's breakeven point in terms of the number of barbecue grills sold?