Blazer Chemical produces and sells an ice-melting granular used on roadways and

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 $21,000 per ton) Cost of goods sold (65 tons at $16,000 per ton) $1,365,000 1,040,000 Gross margin Selling and administrative expenses 325,000 345,150 Net loss $ (20,150) 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 Fixed cost per ton ($780,000+ 65 tons) S 4,000 12,000 Total product cost per ton $16,000 Selling and administrative expenses consist of variable selling and administrative expenses of $310 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

Explanation / Answer

65 tons 100 tons variable cost pwr ton 4000 4000 Fixed cost per ton 12000 7800 (780000/100) Cost of Goods sold pr ton 16000 11800 Number of tons sold 65 100 Total cost of goods sold 1040000 1180000 Income Statement 65 tons 100 tons Sales revenue 1365000 1365000 Less: Cost of goods sold 1040000 767000 Gross Profit 325000 598000 Less: Selling and admin expennse Variable @ 310 20150 20150 Fixed 325000 325000 Net income -20150 252850 Yes, Under absorption costing net income will be higher when more units are produced

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