Logan Industries Ince. Income Statement-Solvent For the Month Ended September 30 Sales (10,000 units) . . Cost of goods sold Gross profit . Selling and administrative expenses Operating loss $ 800,000 (770,000) $ 30,000 (100,000) $ (70,000)
The demand for solvent, one of numerous products manufactured by Logan Industries
Inc., has dropped sharply because of recent competition from a similar product. The
company’s chemists are currently completing tests of various new formulas, and it is
anticipated that the manufacture of a superior product can be started on November 1, one
month in the future. No changes will be needed in the present production facilities to
manufacture the new product because only the mixture of the various materials will be
changed.
The controller has been asked by the president of the company for advice on whether to
continue production during October or to suspend the manufacture of solvent until
November 1. The following data have been assembled:
REFER IMAGE
The production costs and selling and administrative expenses, based on production of
10,000 units in September, are as follows:
| Direct Materials | $35 per unit |
| Direct labor | 24 per unit |
| Variable |
8 per unit |
| Variable selling and administrative expenses | 6 per unit |
| Fixed manufacturing cost | $100,000 for september |
| Fixed selling and administrative expenses | 40,000 for september |
Sales for October are expected to drop about 40% below those of September. No
significant changes are anticipated in the fixed costs or variable costs per unit. No extra
costs will be incurred in discontinuing operations in the portion of the plant associated
with solvent. The inventory of solvent at the beginning and end of October is not expected
to be significant (material).
Instructions
1. Prepare an estimated income statement in absorption costing form for October
for solvent, assuming that production continues during the month.
2. Prepare an estimated income statement in variable costing form for October for
solvent, assuming that production continues during the month.
3. What would be the estimated operating loss if the solvent production were
temporarily suspended for October?
4. What advice should you give to management?
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