The demand for aloe vera hand lotion, one of numerous products manufactured by S

Question

The demand for aloe vera hand lotion, one of numerous products manufactured by Smooth Skin Care Products 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 December 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 November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data: Smooth Skin Care Products Inc. Income Statement-Aloe Vera Hand Lotion For the Month Ended October 31, 2016 1Sales (400,000 units) 2Cost of goods sold 3 Gross profit 4Selling and administrative expenses 5 Operating loss $32,000,000.00 28,330,000.00 3,670,000.00 ,270,000.00 (600,000.00)

Explanation / Answer

Answer

Working

Direct material

$15

Direct labor

$17

Variable manufacturing cost

$35

Fixed manufacturing per unit [based on October [1530000/400000]

$3.825

Total manufacturing cost per unit for November

$70.825

New expected sold units in November = 400000 – 20% = 320000 units

Income Statement – Estimated

Sales

25600000

Cost of Goods Sold:

Direct material [320000 x15]

4800000

Direct labor [320000 x17]

5440000

Variable manufacturing cost [320000 x35]

11200000

Fixed manufacturing per unit [based on October] [320000 x3.825]

1224000

22664000

Gross Profit

$2936000

Selling & Administrative expenses:

Variable

3200000

Fixed

270000

3470000

Operating Profit (Loss)

$(534000)

Sales

25600000

Variable Costs:

Direct material

4800000

Direct labor

5440000

Variable manufacturing cost

11200000

Selling & Administrative expense

3200000

24640000

Contribution Margin

$960000

Fixed Costs:

manufacturing Cost

1530000

Selling & Administrative expense

270000

1800000

Operating Profit (Loss)

$(840000)

If operation is temporarily suspended for November, the Operating loss will be equal to Total Fixed Cost, which are $1,800,000.

Direct material

$15

Direct labor

$17

Variable manufacturing cost

$35

Fixed manufacturing per unit [based on October [1530000/400000]

$3.825

Total manufacturing cost per unit for November

$70.825

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