Income statements under absorption costing and variable    costing

 

The demand for solvent, one of numerous products manufactured by Mac n’ Cheese 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:

 

 

Mac n’ Cheese Industries Inc. Income Statement—Solvent

For the Month Ended April 30, 2016

 

Sales (4,000 units) .......................................................................	$500,000
Cost of goods sold    ......................................................................	   424,000
Gross profit    .............................................................................	$ 76,000
Selling and administrative expenses .....................................................	  102,000
Loss from operations   ....................................................................	$ (26,000)

 

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 associ- ated with solvent. The inventory of solvent at the beginning and end of May is expected to  be inconsequential.

 

 

Instructions

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?

4.                                  What advice should the controller give to management?