The demand for solvent, one of numerous products manufactured by RZM Industries
ID: 341157 • Letter: T
Question
The demand for solvent, one of numerous products manufactured by RZM 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:
RZM Industries Inc.
Income Statement—Solvent
For the Month Ended April 30
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Sales (4,000 units)
$500,000.00
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Cost of goods sold
424,000.00
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Gross profit
$76,000.00
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Selling and administrative expenses
102,000.00
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Loss from operations
$(26,000.00)
The production costs and selling and administrative expenses, based on production of 4,000 units in April, are as follows:
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 associated with solvent. The inventory of solvent at the beginning and end of May is expected to be inconsequential.
Labels and Amount Descriptions
Absorption Costing Income Statement
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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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign.
Score: 8/106
RZM Industries Inc.
Estimated Income Statement—Absorption Costing—Solvent
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Points:
1.89 / 25
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Under absorption costing, the cost of goods sold includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.
Variable Costing Income Statement
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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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign.
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Score: 0/120
RZM Industries Inc.
Estimated Income Statement—Variable Costing—Solvent
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Points:
0 / 27
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Under variable costing, the cost of goods sold includes only variable manufacturing costs.
Final Questions
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3. What would be the estimated loss in income from operations if the solvent production were temporarily suspended for May? If a loss is incurred, enter that amount as a negative number using a minus sign.
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0 / 1
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The estimated loss is calculated by adding the fixed manufacturing cost plus the fixed selling and administrative expenses.
4. What advice should the controller give to management?
Production of solvent should be . Temporary suspension of production would result in an operating loss of compared with an operating loss of if production is continued. The result would be a savings of .
Points:
0 / 4
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Keep in mind that in the short run, fixed costs cannot be avoided.
RZM Industries Inc.
Income Statement—Solvent
For the Month Ended April 30
Explanation / Answer
1) Fixed Manufacturing cost per unit = $100,000/4,000 units = $25 per unit
Units sold in May = 4,000 units*80% = 3,200 units
Total manufacturing cost per unit (Absorbtion costing) = $45+$20+$16+$25 = $106 per unit
Cost of goods sold = 3,200 units*$106 = $339,200
Selling price per unit = $500,000/4,000 units = $125 per unit
Income Statement - Absorption Costing (Amount in $)
2) Variable manufacturing cost per unit (variable costing) = $45+$20+$16 = $81 per unit
Variable manufacturing cost = 3,200 units*$81 per unit = $259,200
Income Statement - Variable Costing (Amount in $)
3) If the solvent production were temporarily suspended for May, then the entire contribution margin of $92,800 will be lost but total fixed cost of $142,000 ($100,000+$42,000) will continue to occur as it can not be avoided. Therefore the net loss from operations in this case will be $142,000
4) Production of solvent should not be supended because temporary suspension of production would result in an operating loss of $142,000 compared with an operating loss of $49,200 if production is continued. The result will be a savings of $92,800 ($142,000 - $49,200).
Sales (3,200 units*$125 per unit) 400,000 Less: Cost of goods sold (339,200) Gross Profit 60,800 Less: Selling and Administrative Expenses Variable Selling and Administrative Expenses ($15 per unit*3,200 units) (48,000) Fixed Selling and Administrative Expenses (42,000) Net Income/(Loss) (29,200)Related Questions
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