Question

1. The demand for aloe vera hand lotion, one of numerous products manufactured by Smooth Skin Care Products 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 December 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 November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data:

   Smooth Skin Care Products Inc. Income Statement—Aloe Vera Hand Lotion For the Month Ended October 31
   Sales (400,000 units)	$32,000,000
   Cost of goods sold	28,330,000
   Gross profit	$3,670,000
   Selling and administrative expenses	4,270,000
   Loss from operations	$(600,000)

   The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows:

   Direct materials	$15	per unit
   Direct labor	17	per unit
   Variable manufacturing cost	35	per unit
   Variable selling and administrative expenses	10	per unit
   Fixed manufacturing cost	$1,530,000	for October
   Fixed selling and administrative expenses	270,000	for October

   Sales for November 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 aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential.

   Required:

   1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month.

   Smooth Skin Care Products Inc.
   Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
   For the Month Ending November 30
   Contribution margin Direct labor Gross profit Manufacturing margin Sales		$
   Cost of goods sold:
   Cost of goods manufactured Direct materials Fixed selling and administrative expense Total cost of goods sold Variable selling and administrative expense	$
   Direct labor Cost of goods manufactured Fixed selling and administrative expense Sales Variable selling and administrative expense
   Fixed cost of goods manufactured Fixed selling and administrative expense Sales Variable manufacturing cost Variable selling and administrative expense
   Fixed manufacturing cost Gross profit Sales Variable selling and administrative expense Total cost of goods sold
   Cost of goods manufactured Direct labor Direct materials Manufacturing margin Total cost of goods sold
   Fixed manufacturing cost Gross profit Manufacturing margin Sales Variable cost of goods manufactured		$
   Selling and administrative expenses:
   Cost of goods manufactured Direct materials Total cost of goods sold Variable cost of goods manufactured Variable selling and administrative expenses	$
   Fixed cost of goods manufactured Fixed direct labor Fixed direct materials Fixed selling and administrative expenses Variable cost of goods manufactured
   Fixed cost of goods manufactured Fixed direct labor Fixed direct materials Total selling and administrative expenses Variable cost of goods manufactured
   Operating income Loss from operations		$

   2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month.

   Smooth Skin Care Products Inc.
   Estimated Income Statement—Variable Costing—Aloe Vera Hand Lotion
   For the Month Ending November 30
   Contribution margin Direct labor Gross profit Manufacturing margin Sales		$
   Variable cost of goods sold:
   Contribution margin Cost of goods sold Direct materials Fixed selling and administrative expense Variable selling and administrative expense	$
   Contribution margin Direct labor Fixed selling and administrative expense Sales Variable selling and administrative expense
   Fixed cost Fixed selling and administrative expense Sales Variable manufacturing cost Variable selling and administrative expense
   Fixed cost Fixed selling and administrative expense Sales Total variable cost of goods sold Variable selling and administrative expense
   Contribution margin Fixed manufacturing cost Inventory, October 31 Manufacturing margin Sales		$
   Cost of goods manufactured Direct labor Direct materials Inventory, October 31 Variable selling and administrative expenses
   Contribution margin Direct labor Direct materials Inventory, October 31 Manufacturing margin		$
   Fixed costs:
   Fixed direct labor Fixed manufacturing cost Fixed sales Total variable cost of goods sold Variable cost of goods manufactured	$
   Fixed cost of goods manufactured Fixed direct labor Fixed selling and administrative expenses Variable cost of goods manufactured Variable selling and administrative expenses
   Fixed cost of goods manufactured Fixed direct labor Total fixed costs Variable cost of goods manufactured Variable selling and administrative expenses
   Operating income Loss from operations		$

   3. What would be the estimated loss in income from operations if the aloe vera hand lotion production were temporarily suspended for November?
   $

   4. What advice should the controller give to management?

   Production of A.V. lotion should be

   • continued
   • discontinued
   . Temporary suspension of production would result in an operating loss of
   • $840,000
   • $1,800,000
   compared with an operating loss of
   • $840,000
   • $1,800,000
   if production is continued. The result would be a savings of
   • $840,000
   • $960,000
   .

Answer 1