Diego Company manufactures one product that is sold for $70 per unit in two geog
ID: 2574499 • Letter: D
Question
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 41,000 units and sold 36,000 units. Variable costs per unit: Manufacturing: Direct materials $ 20 Direct labor $ 10 Variable manufacturing overhead $ 2 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 984,000 Fixed selling and administrative expenses $ 308,000 The company sold 26,000 units in the East region and 10,000 units in the West region. It determined that $150,000 of its fixed selling and administrative expenses is traceable to the West region, $100,000 is traceable to the East region, and the remaining $58,000 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.
Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
INCOME STATEMENT
Total
Company
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
Contribution margin
Contribution loss
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
Net operating income
Net operating loss
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 $10,000 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 6% 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 _____ by _____
15. Assume the West region invests $31,000 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 _____ by _____
13.Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
INCOME STATEMENT
Total
Company
East WestCommon fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
_____ _____ _____Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
_____ _____ _____Contribution margin
Contribution loss
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
_____ _____ _____Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
Common fixed expenses not traceable to regions
Region segment margin
Sales
Traceable fixed expenses
_____Net operating income
Net operating loss
Explanation / Answer
13 Contribution format segmented income statement: Total East West Sales 2520000 1820000 700000 (26000*70) (10000*70) Less:Variable cost (Note:1) 1296000 936000 360000 (26000*36) (10000*36) Contribution margin 1224000 884000 340000 Less:Traceable fixed expenses 250000 100000 150000 Region segment margin 974000 784000 190000 less:common fixed expenses not traceable to regions 1042000 (58000+984000) Net loss -68000 Notes: 1. Variable cost per unit: Direct materials 20 Direct labor 10 Variable manufacturing overhead 2 Variable selling and administrative overhead 4 Total 36 14 profit impact of dropping western region: Segment margin foregone by dropping western region 190000 Less:additional contribution from increased sales 44200 (Note:2) Decrease in profit if western region is dropped 145800 2. Contribution per unit=selling price-variable cost=70-36=34 increase in sales=26000*5%=1300 Increased contribution=1300*34=44200 15 incrase in contribution due to additional sales units (10000*20%*34) 68000 less:Advertisement cost 31000 Increase in profit 37000
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