PLEASE ANSWER THE FOLLOWING QUESTIONS 13 TO 15

Instructions 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. Eye Glass 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. $24 $14 Verable costs per unit Manufacturing: Direct materias Direct labor Variable manufacturing overhead Variable selling and administrative Feed costs per year Fixed manufacturing overhead Fixed selling and administrative open 54 $800,000 $496,000 The company sold 25,000 umits in the East region and 10,000 units in the West region It determined that $250,000 of its fixed selling and acim.inistrative expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96.000 is a common fised 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) Calculation of Unit product cost under Variable costing Direct materials $24 Direct labor 14 Variable manufacturing overhead 2. Unit product cost under variable costing $40 Unit product cost under variable costing $40 2) Calculation of Unit product cost under Absorption costing Direct materials $24 Direct labor 14 Variable manufacturing overhead 2 Fixed manufacturing overhead (800,000/40,000) 20 Unit product cost under absorption costing $60 Unit product cost under absorption costing $60 3) Calculation of Contribution margin under Variable costing Sales (35,000 $80) $2.800,000 Less: Variable expenses: 1,400,000 Variable cost of goods sold (35,000 $40) Variable selling and administrative expenses (35,000 $4) 140,000 1.540,000 Contribution margin $1,260,000 Contribution margin SI 260,000 4) Calculation of Operating income (loss) under Variable costing Fixed expenses Fixed manufacturing overhead-Fixed selling and administrative expenses = $800,000-496,000 = $1.296,000 Net operating incomerlossj= Contribution margin-Fixed expenses = $1.260,000-1.296,000 = $-36.000 Net operating incomellose) S-36.000 5 Gross Margin under absorption costing: Sales Revenue (35,000 units sold X $80 per unit) Cost of Goods Produced (40,000 units produced x $60 per unit) Less: Ending Inventory of Finished Goods (5,000 units X $60) Less: Cost of Goods Sold Gross Margin $28,00,000 $24,00,000 -$3,00,000 -$21,00,000 $7,00,000 6 Net Operating Income under absorption costing $7,00,000 -$1,40,000 Gross Margin (as above) Less: Variable Selling and administrative expenses (35,000 units X $4 per units) Less: Fixed Selling and administrative expenses Net Operating Income/(Loss) -$4,96,000 $64,000 7 Difference in Net operating Income under variable costing and absorption costing: Net Operating Income/(Loss) under variable costing Net Operating Income/(Loss) under absorption costing Difference in Net operating Income under variable costing and absorption costing -$36,000 $64,000 $1,00,000 $1,00,000 The difference is due to following: Fixed Manufacturing cost is included in Ending Inventory under absorption costing and therefore, cost is passed on to next period. Under variable costing Fixed Manufacturing Cost is charged in the year it is incurred. (5,000 unit ending inventory x $20 per unit fixed manufacturing cost) Contribution Margin per unit = Selling Prince per unit - Variable Cost per unit Contribution Margin per unit = $80 - ($24 + $14 + $2 + $4) = $80 - $44 Contribution Margin per unit = $36 Break Even Point in Units = Fixed Cost / Contribution Margin per unit Break Even Point in Units = ($8,00,000+ $4,96,000) / $36 Break Even Point in Units = $12,96,000 / $36 Break Even Point in Units = 36,000 units 8 Break Even Point is higher than actual sales by 1,000 units. Even though actual units sold in (6) are lesser by 1,000 units than break even point, there is profit under absorption costing. This is because fixed manufacturing cost included in ending inventory are passed on to next period. Athunder were the 2006 Weathshell? A D E 9) Break-even point = 36000 units (calculation same as #8) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 10) Contribution margin Less. Fixed expenses Operating loss $1.250,000 $1.296,000 (536,000 Direct materials Direct labor Variable MOH Fixed MOH Unit product cost under absorption costing $24 $14 $2 $23 $63 17 Sales cost of goods sold Gross margin Less. Fixed selling expenses Less. Variable Selling expenses Operating loss $2.800,000 $2 205,000 $595,000 $495.000 $140,000 (541,000) 12) 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Ending Inventory for 1st year is 5000 units. Under absorption costing, fred manufacturing overhead allocated to 1st year ending inventory is 5000(800000140000)=$100000. For the 2nd year beginning inventory has foed manufacturing overhead cost of $100000 under absorption costing Whereas for variable costing beginning inventory doesn't have any foved manufacturing overhead cost. Therefore operating income under absorption posting will be $100.000 lower than operating income under variable costing 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 intemally generated report suggests the region's 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 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 22 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