The demand for solvent, one of numerous products manufactured by Celecia 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 July 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 June or to suspend the manufacture of solvent until July 1. The following data have been assembled: Celecia Industries Inc.Income Statement—SolventFor the Month Ended May 311Sales (25,000 units x $15 per unit)$375,000.002Cost of goods sold(256,250.00)3Gross profit$118,750.004Selling and administrative expenses(77,500.00)5Operating loss$41,250.00 The production costs and selling and administrative expenses, based on production of 25,000 units in May, are as follows:Direct materials$2.50 per unitDirect labor3.00 per unitVariable manufacturing cost0.75 per unitVariable selling and administrative expenses1.50 per unitFixed manufacturing cost$100,000 for MayFixed selling and administrative expenses40,000 for May Sales for June are expected to drop 40% below those of May to 15,000 units (25,000 × 60%). 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 June is not expected to be significant (material). Required:1.Prepare an estimated income statement in absorption costing form for June for solvent, assuming that production continues during the month.2.Prepare an estimated income statement in variable costing form for June for solvent, assuming that production continues during the month.3.What would be the estimated operating loss if the solvent production were temporarily suspended for June?4.What advice should you give to management?

Analyzing the company's net profit or loss is the main goal of an income statement. By deducting…

Answered: he demand for solvent, one of numerous…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter7: Variable Costing For Management analysis

Section: Chapter Questions

Problem 2PA: The demand for solvent, one of numerous products manufactured by Logan Industries Inc., has dropped...

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The demand for solvent, one of numerous products manufactured by Celecia 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 July 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 June or to suspend the manufacture of solvent until July 1. The following data have been assembled:

Celecia Industries Inc.

Income Statement—Solvent

For the Month Ended May 31

1	Sales (25,000 units x $15 per unit)	$375,000.00
2	Cost of goods sold	(256,250.00)
3	Gross profit	$118,750.00
4	Selling and administrative expenses	(77,500.00)
5	Operating loss	$41,250.00

The production costs and selling and administrative expenses, based on production of 25,000 units in May, are as follows:

Direct materials	$2.50 per unit
Direct labor	3.00 per unit
Variable manufacturing cost	0.75 per unit
Variable selling and administrative expenses	1.50 per unit
Fixed manufacturing cost	$100,000 for May
Fixed selling and administrative expenses	40,000 for May

Sales for June are expected to drop 40% below those of May to 15,000 units (25,000 × 60%). 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 June is not expected to be significant (material).

	Required:
1.	Prepare an estimated income statement in absorption costing form for June for solvent, assuming that production continues during the month.
2.	Prepare an estimated income statement in variable costing form for June for solvent, assuming that production continues during the month.
3.	What would be the estimated operating loss if the solvent production were temporarily suspended for June?
4.	What advice should you give to management?

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