Required information The Foundational 15 [LO6-1, LO6-2, LO6-3, LO6-4, LO6-5 [The

Question

Required information The Foundational 15 [LO6-1, LO6-2, LO6-3, LO6-4, LO6-5 [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 Variable costs per unit: Manufacturing Direct materials 21 1e 2 4 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense $1,e60,000 $ 557,00e 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 expense is traceable to the West region, $220,000 is traceable to the East region, and the remaining $67,000 is a common fixed expense. 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. Foundational 6-15 15. Assume the west region invests $43,000 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? Profit will increase by

Explanation / Answer

Calculation of present profitability position West Region East Region Total Sales ($70 per unit) $840,000 $2,520,000 $3,360,000 Less : Variable cost ($37 per unit) $444,000 $1,332,000 $1,776,000 Less : Traceable fixed selling and admin.expenses $270,000 $220,000 $490,000 Contribution Margin $126,000 $968,000 $1,094,000 Less : Fixed Expenses - Manufacturing Overheads $1,060,000 - Selling and administrative expenses $67,000 Profit or (Loss) Margin -$33,000 Calculation of revised profitability position after pursuing the advertisement campaign in West Region West Region East Region Total Sales ($70 per unit) $1,008,000 $2,520,000 $3,528,000 Less : Variable cost ($37 per unit) $532,800 $1,332,000 $1,864,800 Less : Traceable fixed selling and admin.expenses $313,000 $220,000 $533,000 Contribution Margin $162,200 $968,000 $1,130,200 Less : Fixed Expenses - Manufacturing Overheads $1,060,000 - Selling and administrative expenses $67,000 Profit or (Loss) Margin $3,200 Sales in West regison increases to = 12000 units * 120% = 14400 units Revised profit or (loss) $3,200 Less : Present profit or (loss) -$33,000 Increase in profit by $36,200 Profit will increase by $36200.

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