Diego Company manufactures one product that is sold for $80 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 40,000 units and sold 35,000 units.
Variable costs per unit:
Manufacturing:
Direct materials $24
Direct labor $14
Variable manufacturing overhead $2
Variable selling and administrative $4
Fixed costs per year:
Fixed manufacturing overhead $800,000
Fixed selling and administrative expenses $496,000
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.
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 net operating income under variable costing?
5. What is the company's total gross margin under absorption costing?
6. What is the company's 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 company's 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 company's overall break-even point in unit sales?
10. What would have been the company's 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 company's 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?
13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.