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 total gross margin under absorption costing?

Total Gross Margin under absorption costing is $815550

Explanation:

Absorption Costing treats Fixed Manufacturing Costs as a part of product cost.

Sales ($75×52000)                                                                           3900000

Less Cost Cost of Sales

Opening Stock of Finished goods                                        0

Add Production Cost of Finished Goods

Direct Materials ($25× 57000)                                      1425000

Direct Labor ($18× 57000)                                             1026000

Variable Manufacturing Overheads ($5× 57000)         285000

Fixed Manufacturing overheads ($11.32×57000)          645000

                                                                                        3381000

Less Closing Stock of Finished goods

(25+18+5+11.31) × (57000-52000)                                 ( 296550)

Cost of Goods Sold                                                                            3084450

Gross Profit                                                                                            815550

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