The demand for solvent, one of numerous products manufactured byLogan Industries Inc., has dropped sharply because of recentcompetition from a similar product. The company's chemists arecurrently completing tests of various new formulas, and it is anticipatedthat the manufacture of a superior product can be started on November 1, one month in the future. No changes will be needed in the presentproduction facilities to manufacture the new product because only themixture of the various materials will be changed. The controller has been asked by the president of the company foradvice on whether to continue production during October or to suspendthe manufacture of solvent until November 1. The following data havebeen assembled: Logan Industries Inc.Income Statement-SolventFor the Month Ended September 30 Sales (10,000 units) .... ........Cost of goods soldGross profit . . .... ..Selling and administrative expenses...Operating loss . .. . . .. $ 800,000(770,000)$ 30,000(100,000)$(70,000) The production costs and selling and administrative expenses, based onproduction of 10,000 units in September, are as follows: Direct materialsDirect laborVariable manufacturing costVariable selling and administrative expensesFixed manufacturing costFixed selling and administrative expenses $35 per unit24 per unit8 per unit6 per unit$ 100,000 for September40,000 for September Sales for October are expected to drop about 40% below those ofSeptember. No significant changes are anticipated in the fixed costs orvariable costs per unit. No extra costs will be incurred in discontinuingoperations in the portion of the plant associated with solvent. Theinventory of solvent at the beginning and end of October is not expectedto be significant (material). Instructions1. Prepare an estimated income statement in absorption costingform for October for solvent, assuming that production continuesduring the month.2. Prepare an estimated income statement in variable costing form for October for solvent, assuming that production continues duringthe month.3. What would be the estimated operating loss if the solventproduction were temporarily suspended for October?4. What advice should you give to management?
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:
| Logan Industries Inc. 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 production costs and selling and administrative expenses, based on
production of 10,000 units in September, are as follows:
| Direct materials Direct labor Variable manufacturing cost Variable selling and administrative expenses Fixed manufacturing cost Fixed selling and administrative expenses |
$35 per unit 24 per unit 8 per unit 6 per unit $ 100,000 for September 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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