The following information applies to the questions displayed below Diego Company
ID: 2541075 • Letter: T
Question
The following information applies to the questions displayed below Diego Company manufactures one product thet is sold for $73 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 44,000 units and sold 39,000 units. Variable costs per units Manufacturing: Direct naterial Direct labor Variable msnufacturing overhead Variable selling and administrati r Lxed costs per year Fixed nanafacturing overhead 748,000 rixed selling and adminiatrative expense400,000 The company sold 29,000 units in the East region and 10,000 units in the West region. it determined that $180,000 of its fixed selling and administrative expense is traceable to the West region, $130,000 is traceable to the East region, and the remaining $90,000 is a common fixed expense. The company will continue to incur the total amount of its fxed manufacturing overhead costs as long as it continues to produce any amount of its only product 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 $30,000 less than its traceable fixed selling and administrative expenses. Diego beleves thet if it drops the West region, the East region's sales will grow by 5% in Year 2, Using and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 27 Prey Of 9 Next Boo F3 9 6 7 2 3 4Explanation / Answer
14) Contribution per unit = Selling Price per unit - Variable cost per unit
Variable cost per unit = Material+Labor+Variable manufacturing OH+Variable selling and administrative OH
= $23+$16+$2+$4 = $45 per unit
Contribution per unit = $73 per unit - $45 per unit = 28 per unit
Contribution lost from West region = 10,000 units*$28 per unit = $280,000
Saving in Fixed selling and administrative cost = $180,000
Additional Contribution margin from additional sales in East region = (29,000 units*5%)*$28 = $40,600
Net increase/(decrease) in profit = Saving in Selling cost+Additional contribution-Contribution lost
= $180,000+$40,600-$280,000 = ($59,400)
Therefore there is a net decrease in profit of $59,400 if the sales in west region is dropped.
Profit will decrease by $59,400.
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