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 per ton)		960,000
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	$	4,000
Fixed cost per ton ($720,000 ÷ 60 tons)		12,000
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 a 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.)

Answer 1

selling price $21000 Del tou 45 4000 per tou Disect material . Direct labous. . Lost pas ton Valicusale over head. $320 peeton. vuricule selling and administeation $7,20,000 $3,00,000 fined ovel head. Firmed selling & administration - 100 tous unit peoduiced. unit sold 60 tous * fimed cost will not beochanged 16 peoduction is increased to 100 ton Absolphion sone calculating cost pee unit variable afro CA Cable and material cost pee cuvet semed overhead cost po cenit (7,20,000 100 fon) & $4000 poolen $7200 pel ton $11200 pel sou Sales Sales = selling price x No-07 wunit cold. = $ 21000 per ton x 60 tons $12,60,000 / ales la cost or goods sold cost of goods sold = cost per cuit x No.of cugit sold. $11200 pes bon x 60 tons COSI or goods sold $672,000, 101cl selling fabulnisteattle empeuse =(variable seuingf asuluistrative cost pes, emét x. culos sold ) + Fpmed sewinge administrative cost ($320 pel ton x 60 cous) + $3,00,000. 19200+ 3,00,000 soulage aduluiste attue empense = $3,19,200

Income siadement 1) sales less'Cost of goods sold Gross profit Less?:-selling and ab neini- slearPue cost $12,60,000. = 6,73,000) - $5,88,000 =($ 3,193200) $2,68,800 oper ceding income so, Ceratop company cous repost a nebeincome 06 Q $ 2,68,800 by increasing producators to 100 tons and stopping excess production in gan inventory.