Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells 24,750 tons of its granular. Because of this year's mild winter, projected demand for its product is only 19,800 tons. Based on projected production and sales of 19,800 tons, the company estimates the following income using absorption costing. Sales (19,800 tons at $144 per ton) Cost of goods sold (19,800 tons at $60 per ton) Gross profit Selling and administrative expenses Income $ 1,520,000 1,188,000 332,000 332,000 $0 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 ($792,000/19,800 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 $213,200 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 24,750 ton level even though it expects to sell only 19,800 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 24,750 tons and sales of 19,800 tons. Can the company report a positive income by increasing production to 24,750 tons and storing the 4,950 tons of excess production in inventory? 2. By how much does income increase by when producing 24,750 tons and storing 4,950 tons in inventory compared to only producing 19,800 tons?
Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells 24,750 tons of its granular. Because of this year's mild winter, projected demand for its product is only 19,800 tons. Based on projected production and sales of 19,800 tons, the company estimates the following income using absorption costing. Sales (19,800 tons at $144 per ton) Cost of goods sold (19,800 tons at $60 per ton) Gross profit Selling and administrative expenses Income $ 1,520,000 1,188,000 332,000 332,000 $0 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 ($792,000/19,800 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 $213,200 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 24,750 ton level even though it expects to sell only 19,800 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 24,750 tons and sales of 19,800 tons. Can the company report a positive income by increasing production to 24,750 tons and storing the 4,950 tons of excess production in inventory? 2. By how much does income increase by when producing 24,750 tons and storing 4,950 tons in inventory compared to only producing 19,800 tons?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Complete this question by entering your answers in the tabs below.
Required 1 Required 2
Prepare an income statement using absorption costing based on production of 24,750 tons and sales of 19,800 tons. Can the
company report a positive income by increasing production to 24,750 tons and storing the 4,950 tons of excess production in
inventory?
Note: Round your answers to the nearest whole dollar.
BLAZER CHEMICAL
Income Statement (Absorption Costing)
Sales
Cost of goods sold
Selling general and administrative expenses
Contribution margin
Did the company report a positive income?
Required 1 Required 2
$
< Required 1
Increase in income
0
Complete this question by entering your answers in the tabs below.
0
< Required 1
Required 2 >
By how much does income increase by when producing 24,750 tons and storing 4,950 tons in inventory compared to only
producing 19,800 tons?
Required 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
24,750 tons of its granular. Because of this year's mild winter, projected demand for its product is only 19,800 tons. Based on projected
production and sales of 19,800 tons, the company estimates the following income using absorption costing.
Sales (19,800 tons at $144 per ton)
Cost of goods sold (19,800 tons at $60 per ton)
Gross profit
Selling and administrative expenses
Income
$ 1,520,000
1,188,000
332,000
332,000
$0
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 ($792,000/19,800 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 $213,200 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 24,750 ton level even though it expects to sell only 19,800 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 24,750 tons and sales of 19,800 tons. Can the
company report a positive income by increasing production to 24,750 tons and storing the 4,950 tons of excess production in
inventory?
2. By how much does income increase by when producing 24,750 tons and storing 4,950 tons in inventory compared to only
producing 19,800 tons?
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