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 60 tons. Based on its predicted production and sales of 60 tons, the company projects the following income statement (under absorption costing).

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

Selling and administrative expenses consist of variable selling and administrative expenses of $310 per ton and fixed selling and administrative expenses of $300,000 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 60 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 60 tons. (Round your answers to the nearest whole dollar.)

Sales (60 tons at $21,000 per ton) $ 1,260,000 Cost of goods sold (60 tons at $16,000 per ton) 960,000 Gross margin 300,000 Selling and administrative expenses 318,600 Net loss $ (18,600 )

Explanation / Answer

Production Volume Production Volume Cost of goods sold 60 100 Variable direct labour & Material 4000 4000 Fixed cost 12000 7200 (720000/100) Cost of goods sold per unit 16000 11200 Number of tons sold 60 60 Total cost of goods sold 960000 (16000*60) 672000 (11200*60) Income Statement Sales Volume 1260000 1260000 Less: Cost of goods sold 960000 672000 Gross Profit 300000 588000 Less: Variable selling 18600 (310*60) 18600 Less: Fixed selling 300000 300000 -18600 269400 Yes company can report a higher net income amount by producing more units than they sell

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.