Question

In: Accounting

The demand for solvent, one of numerous products manufactured by RZM Industries Inc., has dropped sharply...

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.

Labels and Amount Descriptions

Labels
Cost of goods sold
Fixed costs
For the Month Ending May 31
May 31
Selling and administrative expenses
Variable cost of goods sold
Amount Descriptions
Contribution margin
Contribution margin ratio
Direct labor
Direct materials
Fixed manufacturing cost
Fixed selling and administrative expenses
Gross profit
Income from operations
Loss from operations
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Total cost of goods sold
Total fixed costs
Total selling and administrative expenses
Total variable cost of goods sold
Variable manufacturing cost
Variable selling and administrative expenses

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. 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. . If a net loss is incurred, enter that amount as a negative number using a minus sign. * Please fill in each amount or label according to the blank spaces as follows:

Journal Label _____________

1.1Amount Description _________

1.2abel __________________

1.3__________________

1.4__________________

1.5__________________

1.6 ___________________

1.7 __________________

1.8_________________

1.9 Label ____________

1.10 ______________

1.11 ______________

1.12 ______________

1.13 _____________

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. 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. If a net loss is incurred, enter that amount as a negative number using a minus sign.* Please fill in each amount or label according to the blank spaces as follows:

Journal Label ______________

2.1 Amount Description _________

2.2 Label _____________

2.3 ________________

2.4 _______________

2.5_________________

2.6__________________

2.7__________________

2.8_________________

2.9_______________

2.10 Label _____________

2.11______________

2.12________________

2.13_________________

2.14________________

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. $ ______________

Solutions

Expert Solution

1. RZM Industries Inc.

Absorption Costing Income Statement : Solvent

For the month ended May 31

$
Sales ( 3,200 x $ 125) 400,000
Cost of Goods Sold
Variable Cost of Goods Sold ( 3,200 x $ 81) 259,200
Fixed Manufacturing Cost 100,000
Total Cost of Goods Sold 359,200
Gross Profit 40,800
Selling and Administrative Expenses
Variable Selling and Administrative Expenses ( 3,200 x $ 15) 48,000
Fixed Selling and Administrative Expenses 42,000
Total Selling and Administrative Expenses 90,000
Loss from Operation - 49,200

2. RZM Industries Inc.

Variable Costing Income Statement : Solvent

For the month ended May 31

$ $
Sales 400,000
Less:
Variable Cost of Goods Sold 259,200
Manufacturing Margin 140,800
Variable Selling and Administrative Expenses 48,000
Contribution Margin 92,800
Fixed Cost
Fixed Manufacturing Cost 100,000
Fixed Selling and Administrative Cost 42,000
Total Fixed Costs 142,000
Loss from Operations - 49,200

3. Loss from Operation : - $ 142,000.

Even iof operations were to be suspended during May , the fixed costs would continue regardless. The unabsorbed fixed costs of $ 142,000 would result in operating loss of $ 142,000.

Therefore, it would be prudent for the management to continuing operations during May, even at reducing levels, so that there is some contribution margin towards fixed costs.


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