Question

In: Accounting

Veekay Company was organized on November 1 of the previous year. After seven months of start-up...

Veekay Company was organized on November 1 of the previous year. After seven months of start-up losses, management had expected to earn a profit during June, the most recent month. Management was disappointed, however, when the income statement for June also showed a loss. June’s income statement follows.

Sales                                                                                      $660,000

Less operating expenses

Selling and administrative salaries           $ 39,000

Rent on facilities                                             40,000

Purchases of raw materials                        219,000

Insurance                                                         10,000

Depreciation, sales equipment                     11,000

Utilities costs                                                    55,000

Indirect labour                                               119,000

Direct labour                                                    99,000

Depreciation factory equipment                   13,000

Maintenance factory                                         8,000

Advertising                                                       80,000            691,000

Operating loss                                                                      $(31,000)

After seeing the $31,000 loss for June, Veekay's president stated, "I was sure we'd be profitable within six months, but after eight months we're still spilling red ink. Maybe it's time for us to throw in the towel. To make matters worse, I just heard that Debbie won't be back from her surgery for at least six more weeks."

Debbie is the company's controller; in her absence, the statement above was prepared by a new assistant who has had little experience in manufacturing operations. Additional information about the company follows:

a. Only 85% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

b. Inventory balances at the beginning and end of June were as follows:

                                                                        June 1            June 30

Raw materials                                               $19,000          $46,000

Work in process                   .                       $77,000          $94,000

Finished goods                                            $22,000          $76,000

c. Some 90% of the insurance and 80% of the utilities cost apply to factory operations; the remaining amounts apply to selling and administrative activities.

The president has asked you to check over the above income statement and make a recommendation as to whether the company should continue operations.

Required:

Required:

  1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for June.
  1. As a second step, prepare a new income statement for the month.
  1. Based on your statements prepared in (1) and (2) above, would you recommend that the company continue operations?

Solutions

Expert Solution

Schedule of goods manufactured:
Opening Raw material          19,000
Add: purchase of raw matrerial       219,000
      238,000
Less: Closning raw material -       46,000
raw material used    192,000
Direct labour      99,000
Manufacturing overheads:
Rent (85% of 40000)          34,000
Insurance (90% of 10000)            9,000
utilities (80% of 55000)          44,000
indirect labour       119,000
Maintenece Factory            8,000
Depreciation Factory Equuipment          13,000    227,000
Add: Opening Work in progress      77,000
Less: Ending work in progress -    94,000
Cost of goods manufactured    501,000
Income Statemnet
Veekay Company
Sales          660,000
Cost of goods sold:
Opening Finished goods      22,000
Add: Cost of goods manufactured    501,000
Less: Closing Finished goods -    76,000          447,000
Gross margin          213,000
Less: Operating Expenses:
Selling and adminstration expenses            39,000
Rent (15% of 40000)              6,000
Insurance (10% of 10000)              1,000
Depreciation on sales equipment            11,000
Utilities Cost(20% of 55000)            11,000
Advertisement            80,000
Operating income            65,000

Yes, as there is operating income after correct distribution of expenses, company should conitnue its operations.


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