Question

Diego Company manufactures one product that is sold for $73 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 56,000 units and sold 51,000 units. Variable costs per unit Manufacturing Direct sateriala Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per yeart Fixed manufacturing overhead Fixed welling and administrative expense $784.000 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. 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? Profit will

Answer 1

Direct materials	24
Direct labor	16
Variable manufacturing overhead	2
Variable selling and administrative expense	3
Total variable cost per unit	45
13
	Total company	East	West
Sales	3723000	2774000	949000
Variable expenses	2295000	1710000	585000
Contribution margin	1428000	1064000	364000
Traceable fixed expenses	550000	250000	300000
Region segment margin	878000	814000	64000
Common fixed expenses not traceable to regions	906000
Net Operating loss	(28000)
14
Decrease in Contribution margin of West	-364000	=13000*(73-45)
Avoidable Traceable fixed expenses	300000
Increase in Contribution margin of East	53200	=38000*5%*(73-45)
Net change in profits	-10800
Profit will decrease by 10800