Question

Diego Company manufactures one product that is sold for $75 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 57,000 units and sold 52,000 units. Variable costs per unit: Manufacturing: Direct materials $25 Direct labor $18 Variable manufacturing overhead $3 Variable selling and administrative $5 Fixed costs per year: Fixed manufacturing overhead $627,000 Fixed selling and administrative expenses $645,000 The company sold 36,000 units in the East region and 16,000 units in the West region. It determined that $310,000 of its fixed selling and administrative expense is traceable to the West region, $260,000 is traceable to the East region, and the remaining $75,000 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. Required: What is the company’s net operating income (loss) under absorption costing?

Answer 1

Under absorption costing, the net operating income for the Diego Company is $203,403,000.

Step-by-step explanation:

Under absorption costing, the company includes both variable and fixed manufacturing overhead costs in the cost of each unit produced. To calculate the net operating income, we need to determine the total variable cost per unit, total fixed cost, and the number of units sold in each region.

1. Total variable cost per unit: $25 (direct materials) + $18 (direct labor) + $3 (variable manufacturing overhead) + $5 (variable selling and administrative) = $51
2. Total fixed cost: $627,000 (fixed manufacturing overhead) + $645,000 (fixed selling and administrative expenses) = $1,272,000
3. Units sold in East region: 36,000 x $51 = $1,836,000
4. Units sold in West region: 16,000 x $51 = $816,000
5. Total revenue: ($1,836,000 + $816,000) x $75 = $208,200,000
6. Total cost: $1,272,000 + ($51 x 57,000) = $4,797,000
7. Net operating income: Total revenue - Total cost = $208,200,000 - $4,797,000 = $203,403,000