Question

Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells about 100 tons of its granular. In its nine-year history, the company has never reported a net loss. However, because of this year's unusually mild winter, projected demand for its product is only 65 tons. Based on its predicted production and sales of 65 tons, the company projects the following income statement (under absorption costing).

Sales (65 tons at $20,500 per ton)	$	1,332,500
Cost of goods sold (65 tons at $15,500 per ton)		1,007,500
Gross margin		325,000
Selling and administrative expenses		345,800
Net loss	$	(20,800	)

Its product cost information follows and consists mainly of fixed cost because of its automated production process requiring expensive equipment.

Variable direct labor and material costs per ton	$	4,115
Fixed cost per ton ($740,000 ÷ 65 tons)		11,385
Total product cost per ton	$	15,500

Selling and administrative expenses consist of variable selling and administrative expenses of $320 per ton and fixed selling and administrative expenses of $325,000 per year. The company's president is concerned about the adverse reaction from its creditors and shareholders if the projected net loss is reported. The operations manager mentions that since the company has large storage capacity, it can report a net income by keeping its production at the usual 100-ton level even though it expects to sell only 65 tons. The president was puzzled by the suggestion that the company can report income by producing more without increasing sales.

Required:
1. Can the company report a net income by increasing production to 100 tons and storing the excess production in inventory? Complete the following income statement (using absorption costing) based on production of 100 tons and sales of 65 tons. (Round your answers to the nearest whole dollar.)

	Production volume Cost of goods sold: 65 tons 100 tons Cost of goods sold per unit Number of tons sold Total cost of goods sold SAFETY CHEMICAL Income statement - Absorption method Production volume Sales volume - 65 tons 65 tons 100 tons 0 0 $0 $0 Under absorption costing, can a company report a higher net income amount by producing more units than they sell?

Answer 1

	Production volume
	65 tons	100 tons
production expenses :
variable cost @ 4115 per ton	267475	411500
Fixed production expenses (Given)	740000	740000
Cost of production	1007475	1151500
opening stock	0	0
closing stock (1151500/100*35)(Cost of production/produced units*closing stock)	0	403025
Cost of goods sold	1007475	748475
No. of sold units in tons	65	65
Cost of goods sold per unit	15500	11515

	Safety chemical
	Income statement - absorption method
		Production volume
	sales volume - 65 tons	65 tons	100 tons
	Revenue from operation	1332500	1332500
less	production expenses :
	variable cost @ 4115 per ton	267475	411500
	Fixed production expenses (Given)	740000	740000
	Cost of production	1007475	1151500
add	opening stock	0	0
less	closing stock (1151500/100*35)	0	403025
	Cost of goods sold	1007475	748475
less	selling and administrative expenses :
	variable part	20800	20800
	fixed part	325000	325000
	Total selling and administrative expense	345800	345800
	Net income and loss (COGS - Selling & Adm. Expenses)	-20775	238225

yes, Under absorption costing, a company report a higher net income amount by producing more units than they sell.

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