Question

 

The demand for solvent, one of numerous products manufactured by RZM 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 June 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 May or to suspend the manufacture of solvent until June 1. The controller has assembled the following pertinent data:

RZM Industries Inc.

Income Statement—Solvent

For the Month Ended April 30

1	Sales (4,000 units)	$500,000.00
2	Cost of goods sold	424,000.00
3	Gross profit	$76,000.00
4	Selling and administrative expenses	102,000.00
5	Loss from operations	$(26,000.00)

The production costs and selling and administrative expenses, based on production of 4,000 units in April, are as follows:

Direct materials	$45 per unit
Direct labor	20 per unit
Variable manufacturing cost	16 per unit
Variable selling and administrative expenses	15 per unit
Fixed manufacturing cost	$100,000 for April
Fixed selling and administrative expenses	42,000 for April

Sales for May are expected to drop about 20% below those of the preceding month. 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 May is expected to be inconsequential.

	Required:
1.	Prepare an estimated income statement in absorption costing form for May for solvent, assuming that production continues during the month. Round amounts to two decimals.*
2.	Prepare an estimated income statement in variable costing form for May for solvent, assuming that production continues during the month. Round amounts to two decimals.*
3.	What would be the estimated loss in income from operations if the solvent production were temporarily suspended for May? If a loss is incurred, enter that amount as a negative number using a minus sign.
4.	What advice should the controller give to management?   * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign.

During the first month of operations ended August 31, Kodiak Fridgeration Company manufactured 48,000 mini refrigerators, of which 44,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$8,800,000.00
2	Manufacturing costs:
3	Direct materials	$3,360,000.00
4	Direct labor	1,344,000.00
5	Variable manufacturing cost	816,000.00
6	Fixed manufacturing cost	528,000.00	6,048,000.00
7	Selling and administrative expenses:
8	Variable	$528,000.00
9	Fixed	352,000.00	880,000.00

	Required:
1.	Prepare an income statement based on the absorption costing concept.*
2.	Prepare an income statement based on the variable costing concept.*
3.	Explain the reason for the difference in the amount of income from operations reported in (1) and (2).   * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Enter Inventory, August 31 as a negative number using a minus sign. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Answer 1

Answer

Question 1

Unit (Variable Costing)
Direct Material	45
Direct Labor	20
Variable Manufacturing Overhead	16
Per unit Cost	81
Income Statement (Variable Costing)
	Year 1
	Detail	Net
New Units sold (4,000 Units - 20%)		3200
Sales (@ 125 per unit)		400,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured (3,200 * $81)	259,200
Less: Closing Inventory	-	259,200
Gross Contribution Margin		140,800
Less: Variable Selling and Adm. Expenses (3,200 * $15)		48,000
Contribution Margin		92,800
Less: Fixed Cost
Fixed Manufacturing Cost	100,000
Fixed Selling and Adm. Expenses	42,000	142,000
Net Operating Income		(49,200)

Unit Cost(Absorption Costing)
	Year 1
Direct Material	45.00
Direct Labor	20.00
Variable Manufacturing Overhead	16.00
Fixed Manufacturing per unit ($100,000 / 3,200)	31.25
Per unit Cost	112.25
Income Statement
	Year 1
	Detail	Net
New Units Sold		3200
Sales		400,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured (3,200 * $112.25)	359,200
Less: Closing Inventory		359,200
Gross Profit		40,800
Less: Selling and Administrative Cost
Variable Selling and Adm. Expenses	48,000
Fixed Selling and Adm. Expenses	42,000	90,000
Net Operating Income		(49,200)

3.

If we suspend the production then the loss will be of the Fixed Cost, as Fixed Cost will still be there if we produce or Not.

So

Loss = Fixed Mfg. Cost + Fixed Selling cost

Loss = $142,000 (100,000 + 42,000)

4.

We advise the management not to close the production as if the production is there Company Net Loss is $49,200 but if we suspend the production then Net Loss is $142,000.

So it is recommended not to suspend the production.

Problem 2

1.

Unit (Variable Costing)
Direct Material	76.36
Direct Labor	30.55
Variable Manufacturing Overhead	18.55
Per unit Cost	125.45
Income Statement (Variable Costing)
	Year 1
	Detail	Net
Units sold		44000
Sales		8,800,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured (48,000 * 125.45)	6,021,818
Less: Closing Inventory (4,000 * 125.45)	(501,818)	5,520,000
Gross Contribution Margin		3,280,000
Less: Variable Selling and Adm. Expenses		528,000
Contribution Margin		2,752,000
Less: Fixed Cost
Fixed Manufacturing Cost	528,000
Fixed Selling and Adm. Expenses	352,000	880,000
Net Operating Income		1,872,000

2.

Unit Cost(Absorption Costing)
	Year 1
Direct Material	76.36
Direct Labor	30.55
Variable Manufacturing Overhead	18.55
Fixed Manufacturing per unit ($528,000 / 48,000)	11.00
Per unit Cost	136.45
Income Statement
	Year 1
	Detail	Net
Units Sold		44000
Sales		8,800,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured	6,549,818
Less: Closing Inventory	(545,818)	6,004,000
Gross Profit		2,796,000
Less: Selling and Administrative Cost
Variable Selling and Adm. Expenses	528,000
Fixed Selling and Adm. Expenses	352,000	880,000
Net Operating Income		1,916,000

3.

Net Operating Income as per Variable Costing	1,872,000
Add: Net fixed cost included in Closing Stock {4,000 Units * $11 per unit (Fixed Cost per unit calculated in Absorption costing)}	44,000
Net Operating Income as per Absorption Costing	1,916,000