Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells 20,625 tons of its granular. Because of this year's mild winter, projected demand for its product is only 16,500 tons. Based on projected production and sales of 16,500 tons, the company estimates the following income using absorption costing. Sales (16,500 tons at $100 per ton) Cost of goods sold (16,500 tons at $60 per ton) Gross profit Selling and administrative expenses Income Its product cost per ton follows and consists mainly of fixed overhead because its automated production process uses expensive equipment. Direct materials Direct labor $ 1,650,000 990,000 660,000 211,000 $ 449,000 Variable overhead Fixed overhead ($660, 000/16,500 tons) $ 13 per ton $ 4 per ton $3 per ton $ 40 per ton Selling and administrative expenses consist of variable selling and administrative expenses of $6 per ton and fixed selling and administrative expenses of $211,000 per year. The company's president will not earn a bonus unless a positive income is reported. The controller mentions that because the company has large storage capacity, it can report a positive income by setting production at the usual 20,625 ton level even though it expects to sell only 16,500 tons. The president is surprised that the company can report income by producing more without increasing sales. Required: 1. Prepare an income statement using absorption costing based on production of 20,625 tons and sales of 16,500 tons. Can the company report a positive income by increasing production to 20,625 tons and storing the 4,125 tons of excess production in inventory? 2. By how much does income increase by when producing 20,625 tons and storing 4,125 tons in inventory compared to only producing 16,500 tons?
Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells 20,625 tons of its granular. Because of this year's mild winter, projected demand for its product is only 16,500 tons. Based on projected production and sales of 16,500 tons, the company estimates the following income using absorption costing. Sales (16,500 tons at $100 per ton) Cost of goods sold (16,500 tons at $60 per ton) Gross profit Selling and administrative expenses Income Its product cost per ton follows and consists mainly of fixed overhead because its automated production process uses expensive equipment. Direct materials Direct labor $ 1,650,000 990,000 660,000 211,000 $ 449,000 Variable overhead Fixed overhead ($660, 000/16,500 tons) $ 13 per ton $ 4 per ton $3 per ton $ 40 per ton Selling and administrative expenses consist of variable selling and administrative expenses of $6 per ton and fixed selling and administrative expenses of $211,000 per year. The company's president will not earn a bonus unless a positive income is reported. The controller mentions that because the company has large storage capacity, it can report a positive income by setting production at the usual 20,625 ton level even though it expects to sell only 16,500 tons. The president is surprised that the company can report income by producing more without increasing sales. Required: 1. Prepare an income statement using absorption costing based on production of 20,625 tons and sales of 16,500 tons. Can the company report a positive income by increasing production to 20,625 tons and storing the 4,125 tons of excess production in inventory? 2. By how much does income increase by when producing 20,625 tons and storing 4,125 tons in inventory compared to only producing 16,500 tons?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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3 part 2
Transcribed Image Text:Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells
20,625 tons of its granular. Because of this year's mild winter, projected demand for its product is only 16,500 tons. Based on projected
production and sales of 16,500 tons, the company estimates the following income using absorption costing.
Sales (16,500 tons at $100 per ton)
Cost of goods sold (16,500 tons at $60 per ton)
Gross profit
Selling and administrative expenses
Income
$ 1,650,000
990,000
660,000
211,000
$ 449,000
Its product cost per ton follows and consists mainly of fixed overhead because its automated production process uses expensive
equipment.
Direct materials
Direct labor
Variable overhead
Fixed overhead ($660,000/16, 500 tons)
$ 13 per ton
$ 4 per ton
$3 per ton
$ 40 per ton
Selling and administrative expenses consist of variable selling and administrative expenses of $6 per ton and fixed selling and
administrative expenses of $211,000 per year. The company's president will not earn a bonus unless a positive income is reported. The
controller mentions that because the company has large storage capacity, it can report a positive income by setting production at the
usual 20,625 ton level even though it expects to sell only 16,500 tons. The president is surprised that the company can report income
by producing more without increasing sales.
Required:
1. Prepare an income statement using absorption costing based on production of 20,625 tons and sales of 16,500 tons. Can the
company report a positive income by increasing production to 20,625 tons and storing the 4,125 tons of excess production in
inventory?
2. By how much does income increase by when producing 20,625 tons and storing 4,125 tons in inventory compared to only
producing 16,500 tons?
Complete this question by entering your answers in the tabs below.
Required 1 Required 2
By how much does income increase by when producing 20,625 tons and storing 4,125 tons in inventory compared to only
producing 16,500 tons?
Increase in income
Transcribed Image Text:Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells
20,625 tons of its granular. Because of this year's mild winter, projected demand for its product is only 16,500 tons. Based on projected
production and sales of 16,500 tons, the company estimates the following income using absorption costing.
Sales (16,500 tons at $100 per ton)
Cost of goods sold (16,500 tons at $60 per ton)
Gross profit
Selling and administrative expenses
Income
Its product cost per ton follows and consists mainly of fixed overhead because its automated production process uses expensive
equipment.
Direct materials
Direct labor
Variable overhead
Fixed overhead ($660,000/16,500 tons)
Selling and administrative expenses consist of variable selling and administrative expenses of $6 per ton and fixed selling and
administrative expenses of $211,000 per year. The company's president will not earn a bonus unless a positive income is reported. The
controller mentions that because the company has large storage capacity, it can report a positive income by setting production at the
usual 20,625 ton level even though it expects to sell only 16,500 tons. The president is surprised that the company can report income
by producing more without increasing sales.
Required:
1. Prepare an income statement using absorption costing based on production of 20,625 tons and sales of 16,500 tons. Can the
company report a positive income by increasing production to 20,625 tons and storing the 4,125 tons of excess production in
inventory?
2. By how much does income increase by when producing 20,625 tons and storing 4,125 tons in inventory compared to only
producing 16,500 tons?
$ 13 per ton
$ 4 per ton
$3 per ton
$ 40 per ton
Complete this question by entering your answers in the tabs below.
BLAZER CHEMICAL
Income Statement (Absorption Costing)
$ 1,650,000
990,000
660,000
211,000
$ 449,000
Required 1
Required 2
Prepare an income statement using absorption costing based on production of 20,625 tons and sales of 16,500 tons. Can the
company report a positive income by increasing production to 20,625 tons and storing the 4,125 tons of excess production in
inventory? (Round your answers to the nearest whole dollar.)
Sales
Cost of goods sold
Gross profit
Selling general and administrative expenses
Income
Did the company report a positive income?
$ 1,650,000
Yes
1,650,000
$ 1,650,000
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