The Foundational 15 [LO6-1, LO6-2, LO6-3, LO6-4, LO6-5]
Diego Company manufactures one product that is sold for $80 perunit in two geographic regions—the East and West regions.
Variable costs per unit: Manufacturing: Direct materials $24
Direct labor $ 14
Variable manufacturing overhead $ 2
Fixed costs per year: Fixed manufacturing overhead $ 800,000
Fixed selling and administrative expense $ 496,000
The company sold 25,000 units in the East region and 10,000units in the West region. It determined that $250,000 of its fixedselling and administrative expense is traceable to the West region,$150,000 is traceable to the East region, and the remaining $96,000is a common fixed expense. The company will continue to incur thetotal amount of its fixed manufacturing overhead costs as long asit continues to produce any amount of its only product.
11. What would have been the company’s absorption costing netoperating income (loss) if it had produced and sold 35,000 units?You do not need to perform any calculations to answer thisquestion.
13. Prepare a contribution format segmented income statementthat includes a Total column and columns for the East and Westregions.
14. Diego is considering eliminating the West region because aninternally generated report suggests the region’s total grossmargin in the first year of operations was $50,000 less than itstraceable fixed selling and administrative expenses. Diego believesthat if it drops the West region, the East region's sales will growby 5% in Year 2. Using the contribution approach for analyzingsegment profitability and assuming all else remains constant inYear 2, what would be the profit impact of dropping the West regionin Year 2?
15. Assume the West region invests $30,000 in a new advertisingcampaign in Year 2 that increases its unit sales by 20%. If allelse remains constant, what would be the profit impact of pursuingthe advertising campaign?
