Income statements under absorption costing and variable costing
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, 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 November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data:
The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows:
Sales for November are expected to drop about 20% 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 aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential.
Instructions
- 1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month.
- 2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month.
- 3. What would be the estimated operating loss if the aloe vera hand lotion production were temporarily suspended for November?
- 4. What advice should the controller give to management?
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
Bundle: Managerial Accounting, 15th + Cengagenowv2, 1 Term Printed Access Card
- Bolger and Co. manufactures large gaskets for the turbine industry. Bolgers per-unit sales price and variable costs for the current year are as follows: Bolgers total fixed costs aggregate to 360,000. Bolgers labor agreement is expiring at the end of the year, and management is concerned about the effects of a new labor agreement on its break-even point in units. The controller performed a sensitivity analysis to ascertain the estimated effect of a 10-per-unit direct labor increase and a 10,000 reduction in fixed costs. Based on these data, the break-even point would: a. decrease by 1,000 units. b. decrease by 125 units. c. increase by 375 units. d. increase by 500 units.arrow_forwardAldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The divisions projected income statement for the coming year is: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. (Note: Round answer to the nearest unit.) Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four decimal places, and round the break-even sales revenue to the nearest dollar.) 2. The divisional manager has decided to increase the advertising budget by 250,000. This will increase sales revenues by 1 million. By how much will operating income increase or decrease as a result of this action? 3. Suppose sales revenues exceed the estimated amount on the income statement by 1,500,000. Without preparing a new income statement, by how much are profits underestimated? 4. Compute the margin of safety based on the original income statement. 5. Compute the degree of operating leverage based on the original income statement. If sales revenues are 8% greater than expected, what is the percentage increase in operating income? (Note: Round operating leverage to two decimal places.)arrow_forwardBoston Executive. Inc., produces executive limousines and currently manufactures the mini-bar inset at these costs: The company received an offer from Elite Mini-Bars to produce the insets for $2,100 per Unit and supply 1,000 mini-bars for the coming years estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the companys total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the mini bar production can be used by a different production group that will lease it for $55,000 per year. Should the company make or buy the mini-bar insert?arrow_forward
- Product Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $167,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $381 $209 $199 Unit variable cost 300 171 175 Unit contribution margin $ 81 $ 38 $ 24 Autoclave hours per unit 6 4 2 Total process hours per unit 18 8 6 Budgeted units of production 2,600 2,600 2,600 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium Small Total Units…arrow_forwardProduct Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $290,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $99 $396 $415 Unit variable cost 78 324 365 Unit contribution margin $ 21 $ 72 $ 50 Autoclave hours per unit 2 6 4 Total process hours per unit 6 12 12 Budgeted units of production 4,500 4,500 4,500 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium…arrow_forwardProduct Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $148,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $226 $165 $208 Unit variable cost 178 135 183 Unit contribution margin $ 48 $ 30 $ 25 Autoclave hours per unit 6 4 2 Total process hours per unit 18 8 6 Budgeted units of production 3,200 3,200 3,200 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium…arrow_forward
- Product Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $154,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $6 $413 $448 Unit variable cost (52) (338) (394) Unit contribution margin $ 14 $ 75 $ 54 Autoclave hours per unit 2 6 4 Total process hours per unit 6 12 8 Budgeted units of production 2,400 2,400 2,400 a. Determine the contribution margin by glass type and the total company operating income for the budgeted units of production. Large Medium Small Total Units produced Revenues $4 Variable costs Contribution margin %4 Fixed…arrow_forwardProduct Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $176,000 for the company as a whole. In addition, the following information is available about the three products: Line Item Description Large Medium Small Unit selling price $254 $143 $266 Unit variable cost (200) (117) (234) Unit contribution margin $ 54 $ 26 $ 32 Autoclave hours per unit 6 2 4 Total process hours per unit 12 4 12 Budgeted units of production 3,500 3,500 3,500 a. Determine the contribution margin by glass type and the total company operating income for the budgeted units of production. Line Item Description Large…arrow_forwardProduct Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $85,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $184 $160 $100 Unit variable cost 130 120 76 Unit contribution margin $ 54 $ 40 $ 24 Autoclave hours per unit 3 2 1 Total process hours per unit 5 4 2 Budgeted units of production 3,000 3,000 3,000 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Round the "Unit contribution margin per…arrow_forward
- Product Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $296,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $324 $286 $158 Unit variable cost 255 234 139 Unit contribution margin $ 69 $ 52 $ 19 Autoclave hours per unit 6 4 2 Total process hours per unit 18 8 6 Budgeted units of production 4,700 4,700 4,700 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium Small Total Units…arrow_forwardProduct decisions under bottlenecked operationsYoungstown Glass Company manufactures three types of safety plateglass: large, medium, and small. All three products have high demand.Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is apressurized heat treatment. The autoclave is a production bottleneck.Total fixed costs are $85,000 for the company as a whole. In addition, thefollowing information is available about the three products: Large Medium Small Unit selling price Unit variable cost Unit contribution margin Autoclave hours per unit Total process hours per unit Budgeted units of production $184 130 $54 3 5 3000 $160 120 $40 2 4 3000 $100 76 $24 1 2 3000 a. Determine the contribution margin by glass type and the totalcompany income from operations for the budgeted units of production.b. Prepare an analysis showing which product is tile most profitable perbottleneck hour.arrow_forwardProduct Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $339,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price $216 $116 $647 Unit variable cost (170) (95) (569) Unit contribution margin $ 46 $ 21 $ 78 Autoclave hours per unit 4 2 6 Total process hours per unit 12 4 12 Budgeted units of production 5,200 5,200 5,200arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College