Question

Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells about 100 tons of its granular. In its nine-year history, the company has never reported a net loss. However, because of this year's unusually mild winter, projected demand for its product is only 60 tons. Based on its predicted production and sales of 60 tons, the company projects the following income statement (under absorption costing) Sales (60 tons at $21,000 per ton) $1,260,000 Cost of goods sold (60 tons at $16,000 960,000 per ton) Gross margin 300,000 Selling and administrative expenses 319, 200 Net loss $ (19,200) Its product cost information follows and consists mainly of fixed cost because of its automated production process requiring expensive equipment Variable direct labor and material costs per ton $ 3,000 Fixed cost per ton ($780,000 + 60 tons) 13,000 Total product cost per ton $16,000 Selling and administrative expenses consist of variable selling and administrative expenses of $320 per ton and fixed selling and administrative expenses of $300,000 per year. The company's president is concerned about the adverse reaction from its creditors and shareholders if the projected net loss is reported. The operations manager mentions that since the company has large storage capacity, it can report a net income by keeping its production at the usual 100 ton level even though it expects to sell only 60 tons. The president is puzzled by the suggestion that the company can report income by producing more without increasing sales. Required: 1. Can the company report o net income by increasing production to 100 tons and storing the excess production in inventory? Complete the following income statement (using absorption costing) based on production of 100 tons and sales of 60 tons. (Round your answers to the nearest whole dollar) Production volume 60 tons 100 tons Cost of goods sold: Variable direct labor and material perton Cost of goods sold per unit Number of tons sold Total cost of goods sold BLAZER CHEMICAL Income statement - Absorption method Production volume Sales volume - 60 tons 60 tons 100 tons 0 0 $ ols 0

Answer 1

Cost of Goods Sold Production Volume 60 100 3000 3000 13000 7800 Variable Direct labor and Material Per ton Fixed Overhead Cost ((780000/60, 780,000/100) Cost of Goods Sold Per Unit 16000 10800 Number of Tons Sold 60 60 Total Cost of Goods Sold 960000 648000 (16000*60) (10800*60) BLAZER CHEMICALS Income Statement - Absorption Costing Production Volumes Sales Volume-60 Tons 60 tons 100 Tons Sales 1260000 1260000 Cost of Goods Sold 960000 648000 Gross Margin 300000 612000 Selling General and Administrative Expenses -319200 -319200 Net income (Loss) -19200 292800 19200 Selling General and Administrative Expenses Variable cost @320 (60*320) Fixed Total 19200 300000 319200 300000 319200