14 Required information The following information applies to the questions displ

Question

14 Required information 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 41,000 units and sold 36,000 units. Part 14 of 1 Variable costs per unit Manufacturing: oireet a Varlable sanefactaring overhead varlable selling and adninistrative Fixed costs pe Fixed manufaoturing overhead Fixed selling and administrative expe se 984,000 30.,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 expense is traceable to the West region, S100,000 is traceable to the East region, and the remaining $58,000 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. 14. Diego is considering eliminating the West region because an internally generated report suggests the region's total gross marginn 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?

Explanation / Answer

Increase in Sales of East Region = 26,000 * 6% = 1,560 units

Additional Contribution margin on sale of 1560 units (B) = 1,560 * 34 = $ 53,040

Net Decrease in profit on dropping west region = (A) - (B) = 190,000 - 53,040 = 1,36,960

Further, the deficit of gross margin of $ 10,000 as compared to fixed selling & admin cost is calculated based on absorption costing.

Per unit Total Sales (10,000 units)               70          7,00,000 Less: Variable Cost: - Direct Material               20          2,00,000 - Direct Labour               10          1,00,000 - Variable Mfg. Overhead                 2             20,000 - Variable Selling & admin overhead                 4             40,000 Contribution Margin               34          3,40,000 Less: Traceable Fixed Cost (given)          1,50,000 Loss of Discontinuing west region (A)          1,90,000

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