Question

2

Encome Statements under Absorption Costing and Variabile Casting 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. month in the future. No changes will be needed in the present production facilities to manufacture the new product because only the midture 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 Sales (400,000 units) $32.000.000 Cost of goods sold Gross profit $3.670.000 Selling and administrative 4.270.000 Lors from operations $ 600.000 The production costs and selling and administrati expenses based on production of 400,000 units in October Direct materials Direct labor Variable manufacturing cost Variable selling and administrative s Femaacturing 51 5 000 for et 270.000 for October Fb selling and administrativa enses xt garantated the federal conte Sales November pacted to drop about these

Answer 1

1)
SMOOTH SKIN CARE PRODUCTS INC.
Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
For the Month Ending November 30
Sales 400,000  x (1 - 20%) = $320,000 x $80		$ 25,600,000.00
Cost of goods sold:
Direct materials (320,000 x $15)	$   4,800,000.00
Direct labor (320,000 x $17)	$   5,440,000.00
Variable manufacturing cost (320,000 x $35)	$ 11,200,000.00
Fixed manufacturing cost	$   1,530,000.00
Cost of goods sold		$ 22,970,000.00
Gross Profit		$   2,630,000.00
Selling and administrative expenses:
Variable selling and administrative expenses (320,000 x $10 )	$   3,200,000.00
Fixed selling and administrative expenses	$      270,000.00	$   3,470,000.00
Operating Loss		$    (840,000.00)
2)
SMOOTH SKIN CARE PRODUCTS INC.
Estimated Income Statement—Variable  Costing—Aloe Vera Hand Lotion
For the Month Ending November 30
Sales 400,000  x (1 - 20%) = $320,000 x $80		$ 25,600,000.00
Variable Cost of goods sold:
Direct materials (320,000 x $15)	$   4,800,000.00
Direct labor (320,000 x $17)	$   5,440,000.00
Variable manufacturing cost (320,000 x $35)	$ 11,200,000.00	$ 21,440,000.00
Manufacturing margin		$   4,160,000.00
Variable selling and administrative expenses (320,000 x $10 )		$   3,200,000.00
Contribution margin		$      960,000.00
Fixed  cost :
Fixed manufacturing cost	$   1,530,000.00
Fixed selling and administrative expenses	$      270,000.00	$   1,800,000.00
Operating Loss		$    (840,000.00)
3)
Fixed manufacturing cost ($1,530,000)  + fixed selling and administrative expenses of ($270,000)	$   1,800,000.00
4)
Production of A.V. lotion should be continued. Temporary suspension of production would result in an operating loss of $1,800,000 ,compared with an operating loss of $840,000 if production is continued.  The result  would be savings of $960,000.(the excess of $1,800,000 over $840,000)