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The Foundational 15 (Static) [LO7-1, LO7-2, LO7-3, LO7-4, LO7-5]
[The following information applies to the questions displayed below.]
Diego Company manufactures one product that is sold for $80 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 40,000 units and
sold 35,000 units.
Variable costs per unit:
Manufacturing:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and, administrative
Fixed costs per year:
Fixed manufacturing overhead
Fixed selling and administrative expense
$ 24
$ 14
Profit will
$2
$4
The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that $250,000 of its
fixed selling and administrative expense is traceable to the West region, $150,000 is traceable to the East region, and the
remaining $96,000 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.
by
$ 800,000
$ 496,000
Foundational 7-14 (Static)
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 $50,000 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?