Diego Company manufactures on product that is sold for $81.00 per unit in two geographic regions, the 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.

Variable costs per unit: Manufacturing Direct materials.................................................$26 Direct labor.........................................................$12 Variable manufacturing overhead.....................$3 Variable selling and administrative.............................$5 Fixed costs per year: Fixed manufacturing overhead..............................$800,000 Fixed Selling and administrative............................$496,000

Answer each question independently based on the original data unless instructed otherwise. You don't need to prepare a segmented income statement.

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 unit sales? Compare the break-even point in unit sales 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? No calculations are necessary.