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.

Answer 1

a)	RZM Industries Inc.
	Estimated Income Statement—Absorption Costing—Solvent
	For the Month Ending May 31, 2017
	Sales (4000 units x 80%* $125)		$400,000.00
	Less: Cost of goods sold:
	Direct materials (3200 x $45)	$144,000.00
	Direct labor = (3200 x $20)	$64,000.00
	Variable manufacturing cost (3200 x 16)	$51,200.00
	Fixed manufacturing cost	$100,000.00
	Cost of goods sold		$359,200.00
	Gross profit		$40,800.00
	Selling and administrative expenses:
	Variable selling and administrative expenses		$48,000.00
	Fixed selling and administrative expenses		$42,000.00
	Loss from operations		($49,200.00)
b)	RZM Industries Inc.
	Estimated Income Statement—Variable Costing—Solvent
	For the Month Ending May 31, 2017
	Sales (4000 units x80%*$25)		$400,000.00
	Less: Cost of goods sold:
	Direct materials = (3200 x $45)	$144,000.00
	Direct labor = (3200 x $20)	$64,000.00
	Variable manufacturing cost (3200 x $16)	$51,200.00
	Total variable cost of good sold		$259,200.00
	Manufacturing margin		$140,800.00
	Less: Variable selling and administrative expenses		$48,000.00
	Planned Contribution margin		$92,800.00
	Fixed costs:
	Fixed manufacturing cost	$100,000.00
	Fixed selling and administrative expenses	$42,000.00
	Total Fixed costs		$142,000.00
	Loss from operations		($49,200.00)
3)	Loss from operations
	Fixed manufacturing cost	$100,000.00
	Fixed selling and administrative expenses	$42,000.00
	Total Fixed costs		$142,000.00
4)	Production of solvent should be continued
	Temporary suspension of production would result in an operating loss of $142,000, and if production is continued then with a loss from operations would be $49200. Hence Net aving Will be $92800