In: Accounting
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?
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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 |
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. 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.
RZM Industries Inc. |
Estimated Income Statement—Absorption Costing—Solvent |
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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. 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.
RZM Industries Inc. |
Estimated Income Statement—Variable Costing—Solvent |
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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?
Production of solvent should be ____ . Temporary suspension of production would result in an operating loss of ____ compared with an operating loss of ____ if production is continued. The result would be a savings of _____ .
3. What would be the estimated loss in income from operations if the solvent production were temporarily suspended for May?
If the solvent production were temporarily suspended for may, solvent would incurred loss of ($100000) (Fixed Manufacturing costs) in income from operation.
4. What advice should the controller give to management?
Production of solvent should be Continue. Temporary suspension of production would result in an operating loss of $100000. compared with an operating loss of $49200 if production is continued. The result would be a savings of $50800.
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