Concept explainers
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:
The production costs and selling and administrative expenses, based on production of 10,000 units in September, are as follows:
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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Chapter 7 Solutions
Managerial Accounting
- Equivalent Units and Related Costs; Cost of Production Report; Entries Dover Chemical Company manufactures specialty chemicals by a series of three processes, all materials being introduced in the Distilling Department. From the Distilling Department, the materials pass through the Reaction and Filling departments, emerging as finished chemicals. The balance in the account Work in Process—Filling was as follows on January 1: Work in Process—Filling Department (2,500 units, 60% completed): Direct materials (2,500 x $15.90) $39,750 Conversion (2,500 x 60% x $10.30) 15,450 $55,200 The following costs were charged to Work in Process—Filling during January: Direct materials transferred from Reaction Department: 32,300 units at $15.60 a unit $503,880 Direct labor 169,330 Factory overhead 162,680 During January, 32,000 units of specialty chemicals were completed. Work in Process—Filling Department on January 31 was 2,800 units, 40% completed. Required:…arrow_forwardAnswer? ? Financial accounting questionarrow_forwardCompute the standard direct material cost of a wooden cabinetarrow_forward
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