Question

the company sold 38,000 units in the east region and 13,000 units in the west region. it determined that $300,000 of its fixed selling and administrative expense is traceable to the west region, $250,000 is traceable to the east region, and the remaining $122,000 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. 1. What is the unit product cost under variable costing?
2. What is the unit product cost under absorption costing?
3. What is the company’s total contribution margin under variable costing?
4. What is the company’s net operating income (loss) under variable costing?
5. What is the company’s total gross margin under absorption costing?
6. What is the company’s net operating income (loss) under absorption costing?
7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
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 51,000 units?
11. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 51,000 units?
12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2?
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 $79,000 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 $46,000 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?

Answer 1

Under absorption costing, the per-unit costs are first added up to reach the product cost (direct labor, direct materials, variable overhead). The fixed overhead must then be subtracted from per-unit costs in order to apply per-unit overhead to per-unit costs.

Under absorption costing, where do you find the unit product cost?

You can achieve this by using the following formula:

Absorption cost per unit is calculated as follows: (Direct Material Costs + Direct Labor Costs + Variable + Fixed Manufacturing Overhead Costs) / Number of Produced Units.

What does variable costing's unit product cost look like?

The fixed factory overhead rate per unit can be subtracted from the unit product cost under absorption costing to get the unit product cost under variable costing.

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