[The following information applies to the questions displayed below.] Diego Comp

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[The following information applies to the questions displayed below.]

Diego Company manufactures one product that is sold for $70 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 53,000 units and sold 48,000 units.

The company sold 36,000 units in the East region and 12,000 units in the West region. It determined that $270,000 of its fixed selling and administrative expenses is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 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.

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 $66,000 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 2?

profit will and by

Diego Company manufactures one product that is sold for $70 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 53,000 units and sold 48,000 units.

Explanation / Answer

Variable cost=21+10+2+4=$37

Sale=$70

Contribution=$70-$37=$33

contribution year 1=48,000*33=$1,584,000

net income=$1,584,000-$1,060,000-$557,000=-$33,000

14. if we drop by west region then the East region's sales will grow by 5% in Year 2

so revised sales units in east region=36,000*1.05=37,800

Fixed selling and administrative expenses=Relating east region+Common cost=$270,000+$67,000=$337,000

so contribution for year 2=37,800*33=$1,247,400

net income=$1,247,400-$1,060,000-$337,000=-$149,600

the loss will increse by $116,600 by dropping the west region

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