Please explain in detail that why Mr. Yoder is so confused about the income statements of first two quarters? "These statements can't be right," said Ben Yoder, president of Rayco, Inc. “Our sales in the sec-ond quarter were up by 25% over the first quarter, yet these income statements show a precipitousdrop in net operating income for the second quarter. Those accounting people have fouled some-thing up." Mr. Yoder was referring to the following statements (absorption costing basis):Rayco, Inc.Income StatementsFor the First Two QuartersFirst QuarterSecond QuarterSales .....$480,000$600,000Cost of goods sold.240,000372,000Gross margin ..Selling and administrative expenses240,000228,000215,000200,000Net operating income..$ 40,000$ 13,000After studying the statements briefly, Mr. Yoder called in the controller to see if the mistake inthe second quarter could be located before the figures were released to the press. The controllerstated, “T'm sorry to say that those figures are correct, Ben. I agree that sales went up during thesecond quarter, but the problem is in production. You see, we budgeted to produce 15,000 units eachquarter, but a strike on the west coast among some of our suppliers forced us to cut production in thesecond quarter back to only 9,000 units. That's what caused the drop in net operating income." Mr. Yoder was confused by the controller's explanation. He replied, "This doesn't make sense.I ask you to explain why net operating income dropped when sales went up and you talk aboutproduction! So what if we had to cut back production? We still were able to increase sales by 25%.If sales go up, then net operating income should go up. If your statements can't show a simplething like that, then it's time for some changes in your department!"Budgeted production and sales for the year, along with actual production and sales for the firsttwo quarters, are given below:QuarterFirstSecondThirdFourthBudgeted sales (units).Actual sales (units) ...Budgeted production (units).Actual production (units)12,00012,00015,00015,00015,00015,00018,00015,000--15,00015,00015,0009,000-....

Mr. Yoder is confused to see the Income statements of both the quarters because of the general idea…

Answered: Please explain in detail that why Mr.…

Please explain in detail that why Mr. Yoder is so confused about the income statements of first two quarters?

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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