The demand for solvent, one of the numerous products manufactured by Heyward Industries Inc., has...
Income Statements under Absorption and Variable Costing
The demand for solvent, one of the numerous products manufactured by Heyward 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:
|Heyward Industries Inc.
Income Statement - Solvent
For the month Ended April 30, 2015
|Sales (3,900 units)||$421,200|
|Cost of Goods Sold||354,700|
|Selling and administrative expenses||83,300|
|Loss from operations||$(16,800)|
The production costs and selling and administrative expenses, based on production of 3,900 units in April, are as follows:
|Direct materials||$40 per unit|
|Direct labor||18 per unit|
|Variable manufacturing cost||15 per unit|
|Variable selling and administrative expenses||12 per unit|
|Fixed manufacturing cost||$70,000 for April|
|Fixed selling and administrative expenses||36,500 for April|
Sales for May are expected to drop about 25% 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.
1. Prepare an estimated income statement in absorption costing form for May for solvent, assuming that production continues during the month. 2. Prepare an estimated income statement in variable costing form for May for solvent, assuming that production continues during the month. 3. What would be the estimated loss in income from operations if the solvent production were temporarily suspended for May?
4. Production of solvent should be (continued or discontinued)?_____. Temporary suspension of production would result in an operating loss of ($39,225 or $106,500)?_____ compared with an operating loss of ($39,225 or $106,500)?_____ if production is continued. The result would be a savings of ($39,225 or $67,275)?_____.
Managerial accounting correlates to the computation of flexible budgeting analysis and the formation of budget performance report, to compare the actual and planned budget so that management can make adjustments.
Answer and Explanation: 1
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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.
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