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.

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 $50000 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 for year 2?

15. Assume the west region invests $30000 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?

Variable costs per unit
Manufacturing:
Direct Materials					$ 24.00
Direct Labor					$ 14.00
Variable manufacturing overhead					$ 2.00
Variable selling and administrative					$ 4.00
Fixed costs per year
Fixed manufacturing overhead					$ 800,000.00
Fixed selling and administrative expenses					$ 496,000.00
					Variable costing	Absorption costing
1 - 2
	Direct materials
	Direct labor
	Variable manufacturing overhead
	Fixed manufacturing overhead
	Unit product cost
3-4
	Sales
	Variable expenses:
	Variable cost of goods sold
	Variable selling and administrative
	Contribution margin
	Fixed expenses:
	Fixed manufacturing overhead
	Fixed selling and administrative
	Net operating gain (loss)
5-6	Sales
	Cost of goods sold
	Gross margin
	Selling and administrative expenses
	Net operating income
7	Variable costing net operating income
	Add: fixed manufacturing overhead
	deferred in inventory under absorption costing						units
	Absorption costing net operating income						per unit
8	Profit	=	Unit CM X Q - Fixed expenses
9
10-11	Sales
	Variable expenses:
	Variable cost of goods sold
	Variable selling and administrative
	Contribution margin
	Fixed expenses:
	Fixed manufacturing overhead
	Fixed selling and administrative
	Net operating gain (loss)
12
13				Total	East	West
	Sales
	Variable expenses
	Contribution margin
	Traceable fixed expenses
	Region segment margin
	Common fixed expenses
	not traceable to regions
	Net operating gain (loss)
14	Foregone segment margin in the West region
	Additional contribution margin in the East region
	Increase (decrease) in profits if the West region is dropped
15.	Additional advertising
	Additional contribution margin in the West region
	Increase in profits