Diego Company manufactures one product that is sold for $70

Diego Company manufactures one product that is sold for $70 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 41,000 units and sold 36,000 units.

The company sold 26,000 units in the East region and 10,000 units in the West region. It determined that $150,000 of its fixed selling and administrative expense is traceable to the West region, $100,000 is traceable to the East region, and the remaining $58,000 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 company’s total gross margin under absorption costing?
2. What is the company’s net operating income (loss) under absorption costing?
3. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
4. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 36,000 units? You do not need to perform any calculations to answer this question.
5. Prepare a contribution format segmented income statement that includes a Total column and columns for the East and West regions.
6. 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 $10,000 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 6% 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?