Diego Company manufactures one product that is sold for $81 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 52,000 units and sold 47,000 units.
Variable costs per unit: Manufacturing: Direct materials $ 20
Direct labor $ 20
Variable manufacturing overhead $ 4
Variable selling and administrative $ 6
Fixed costs per year: Fixed manufacturing overhead $ 936,000
Fixed selling and administrative expenses $ 552,000
The company sold 35,000 units in the East region and 12,000 units in the West region. It determined that $260,000 of its fixed selling and administrative expenses is traceable to the West region, $210,000 is traceable to the East region, and the remaining $82,000 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.
PLEASE EXPLAIN IN DETAIL, HELP ME LEARN.
8. What is the company’s break-even point in unit sales?
9. If the sales volumes in the East and West regions had been reversed, what would be the company’s overall break-even point in unit sales?
10. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 47,000 units?
11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 47,000 units?
13. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
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 $32,000 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?
15. Assume the West region invests $42,000 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?

The company's break-even point in unit sales is calculated by dividing the total fixed costs by the contribution margin per unit.

In this case, the fixed costs consist of the fixed manufacturing overhead ($936,000) and the fixed selling and administrative expenses ($634,000). The variable costs per unit add up to $50 ($20 + $20 + $4 + $6), and the selling price per unit is $81. Therefore, the contribution margin per unit is $31 ($81 - $50). The break-even point can be calculated as follows: Break-even point = Total fixed costs / Contribution margin per unit = ($936,000 + $634,000) / $31 = $1,570,000 / $31 ≈ 50,645 units.

If the sales volumes in the East and West regions were reversed, the company's overall break-even point in unit sales would remain the same. The break-even point is determined by considering the total fixed costs and the contribution margin per unit, which do not depend on the sales distribution between regions.

To calculate the variable costing net operating income (loss) for producing and selling 47,000 units, we need to determine the total variable costs and deduct them from the total sales revenue. The variable costs consist of the variable manufacturing costs ($44 per unit) and the variable selling and administrative costs ($6 per unit), totaling $50 per unit. The sales revenue is calculated by multiplying the number of units sold (47,000) by the selling price per unit ($81). The variable costing net operating income can be calculated as follows: Net operating income = (Sales revenue - Total variable costs) - Total fixed costs = (47,000 units × $81) - (47,000 units × $50) - ($936,000 + $634,000).

The absorption costing net operating income (loss) takes into account both fixed and variable manufacturing costs. In this case, the fixed manufacturing overhead is considered a product cost and is absorbed into the cost of each unit produced. The absorption costing net operating income can be calculated by subtracting the total manufacturing costs (variable and fixed) from the sales revenue, and then deducting the total fixed selling and administrative expenses. The total manufacturing costs per unit are calculated as follows: $50 (variable manufacturing costs) + ($936,000 / 52,000 units). The absorption costing net operating income can be calculated using the same formula as in the variable costing approach.

To prepare a contribution format segmented income statement, we need to allocate the fixed selling and administrative expenses to the East and West regions based on their traceability. The allocated amounts are $210,000 for the East region, $260,000 for the West region, and $82,000 as a common fixed cost. The income statement should include columns for the East and West regions as well as a Total column. In each region's column, the sales revenue, variable costs, and allocated fixed costs should be listed. The contribution margin can be calculated by subtracting the variable costs from the sales revenue, and the net operating income can be calculated by deducting the allocated fixed costs from the contribution margin.

If the West region is dropped, the company's profit impact in Year 2 can be determined by analyzing the change in contribution margin. With the West region eliminated, the fixed selling and administrative expenses allocated to the region ($260,000) would be eliminated as well. Additionally, the East region's sales are expected to grow by 5%. By calculating the increase in contribution margin resulting from the sales growth and deducting the eliminated fixed expenses, the profit impact of dropping the West region in Year 2 can be determined.

In Year 2, if the West region invests $42,000 in a new advertising campaign.

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