Chapter 20 Variable Costing for Management Analydil Obi, 1,2 5960.000 Care Produ

Question

Chapter 20 Variable Costing for Management Analydil Obi, 1,2 5960.000 Care Products Inc., has dropped sharply because of recent competitioby m 1 to manufacture the ne whether numerous products manufactured The company's chemists are currently completing tests of various new fr similar skn pated that the manufacture of a superior product can be started on Dece andit the future. No changes will be needed in the present production facilities One product because only the mixture of the various materials will be changed.matt PR 20-28 Income statements under absorption costing and variable cost rom tribution The demand for aloe vera hand lotion, one of on continue production during November or to suspend the manufacture of al until December 1. The controller has assembled the following pertinent data The controller has been asked by the president of the company for advice Smooth Skin Care Products Inc. Income Statement-Aloe Vera Hand Lotion For the Month Ended October 31 Sales (400,000 units) Cost of goods sold Gross profit Selling and administrative expenses. " Loss from operations. 28,330,000 3,670,000 ,270,000 The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows: Direct materials Direct labor Variable manufacturing cost Variable selling and administrative expenses $15 per unit 7 per unit 35 per unit 10 per unit Fixed manufacturing cost Fixed selling and administrative expenses $1,530,000 for October 270,000 for October Sales for November 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. costs will be incurred in discontinuing operations in the portion of the plant associated w aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and November is expected to be inconsequential No extri Instructions 1. Prepare an estimated income statement in absorption costing form for November vera hand lotion, assumi hand lotion, production were ing that production continues during the month. 2. Prepare an estimat e statement in variable costing form for November fo assuming that production continues during the month aloe ver 3. What would be the estimated loss in income from operations if temporarily suspended for November? What advice should the controller give to managemen PR 20-3B Absorption and variable cos two months and analysis During the first month of operati which 5,200 were sold ting income statements for Obi 12

Explanation / Answer

1) The units sold in November = 20% below the units sold in October

= 400,000 units*80% = 320,000 units

Sale price per unit in October = October Sales/Units sold

= $32,000,000/400,000 = $80 per unit

Fixed Manufacturing Overhead for November = $1,530,000

Variable manufacturing cost per unit = $15+$17+$35 = $67 per unit

Cost of good sold under absorption costing = (320,000 units*$67)+$1,530,000

= $21,440,000+$1,530,000 = $22,970,000

Absorption costing income statement for November (Amount in $)

2) Variable Costing Income Statement for November (Amount in $)

3) If the aloe vera hand lotion is suspended temporarily for the month of November, then there will be a loss of contribution margin of $960,000. In case of temporary suspension fixed cost continue to occur and hence fixed costs are not relevant for this decision. Therefore the total estimated loss in income from operations is $960,000 (i.e. contribution margin as calculated requirement 2 of the question).

4) The controller should give advice to management that the aloe vera hand lotion should not be temporarily suspended because there is a an estimated loss in income from operations of $960,000 from the suspension of the product.

Sales (320,000 units*$80 per unit) 25,600,000 Less: cost of goods sold (22,970,000) Gross Profit 2,630,000 Less: Variable Selling & Admin. Exp. (320,000 units*$10) (3,200,000) Less: Fixed Selling & Admin. Exp. (270,000) Net Loss (840,000)

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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