Question

The demand for solvent, one of numerous products manufactured by Logan 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 November 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 October or to suspend the manufacture of solvent until November 1. The following data have been assembled:

Logan Industries Inc.

Income Statement—Solvent

For the Month Ended September 30

1	Sales (10,000 units)	$800,000.00
2	Cost of goods sold	(770,000.00)
3	Gross profit	$30,000.00
4	Selling and administrative expenses	(100,000.00)
5	Operating loss	$(70,000.00)

The production costs and selling and administrative expenses, based on production of 10,000 units in September, are as follows:

Direct materials	$35 per unit
Direct labor	24 per unit
Variable manufacturing cost	8 per unit
Variable selling and administrative expenses	6 per unit
Fixed manufacturing cost	$100,000 for September
Fixed selling and administrative expenses	40,000 for September

Sales for October are expected to drop about 40% below those of September. 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 October is not expected to be significant (material).

	Required:
1.	Prepare an estimated income statement in absorption costing form for October for solvent, assuming that production continues during the month.*
2.	Prepare an estimated income statement in variable costing form for October for solvent, assuming that production continues during the month.*
3.	What would be the estimated operating loss if the solvent production were temporarily suspended for October? If a loss is incurred, enter that amount as a negative number using a minus sign.
4.	What advice should you give to management? *Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative.

Answer 1

1.

Income Statement (Absorption Costing)
Sales	$      4,80,000	=6000*80
Cost of Goods Sold	$      5,02,000	=6000*67+100000
Gross Profit	$        -22,000
Selling and administrative expenses	$         76,000	=6000*6+40000
Operating Loss	$        -98,000

2.

Income Statement (Variable Costing)
Sales	$      4,80,000	=6000*80
Less : Variable Costs
Variable Cost of Goods Sold	$      4,02,000	=6000*67
Selling and administrative expenses	$         36,000	=6000*6
Contribution Margin	$         42,000
Less : Fixed Costs
Manufacturing Cost	$      1,00,000
Selling and administrative expenses	$         40,000
Operating Loss	$        -98,000

3. Operating loss = ($140000) i.e. Fixed costs will still be incurred.

4. Company should not suspend production of Solvent