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 $20,500 per ton) $ 1,230,000 Cost of goods sold (60 tons at $15,500 per ton) 930,000 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 $ 3,167 Fixed cost per ton ($740,000 ÷ 60 tons) 12,333 Total product cost per ton $ 15,500
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 was 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.)
Production volume Cost of goods sold: 60 tons 100 tons Cost of goods sold per unit Number of tons sold Total cost of goods sold SAFETY CHEMICAL Income statement - Absorption method Production volume Sales volume - 60 tons 60 tons 100 tons Under absorption costing, can a company report a higher net income amount by producing more units than they sell?
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 $20,500 per ton) | $ | 1,230,000 | |||
| Cost of goods sold (60 tons at $15,500 per ton) | 930,000 | ||||
| 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 | $ | 3,167 | |
| Fixed cost per ton ($740,000 ÷ 60 tons) | 12,333 | ||
| Total product cost per ton | $ | 15,500 | |
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 was 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.)
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Related questions
Factor Co. can produce a unit of product for the following costs:
| Direct material | $ | 8 | |
| Direct labor | 24 | ||
| Overhead | 40 | ||
| Total costs per unit | $ | 72 | |
An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:
Multiple Choice
Buy since the relevant cost to make it is $32.
Buy since the relevant cost to make it is $56.
Buy since the relevant cost to make it is $48.
Make since the relevant cost to make it is $32.
Make since the relevant cost to make it is $48.
Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesalerâs name and would not affect Bluebirdâs sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental revenue will be:
Multiple Choice
$11,250.
$7,500.
$33,750.
$33,750.
$45,000.
A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What should the company do?
Multiple Choice
Since both alternatives produce a loss, store the units in hopes of a better price later.
Rebuild the units.
It does not matter because both alternatives have the same result.
Sell the units as scrap.
Throw the units away.
Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:
Multiple Choice
$18,000 decrease
$52,000 increase
$76,000 increase
$22,000 increase
Derby Inc. manufactures a product which contains a small part. The company has always purchased this motor from a supplier for $125 each. Derby recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the motor instead of buying it. The company prepared the following per unit cost projections of making the motor, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 150% of direct labor cost.
| Direct material | $ | 38 | |
| Direct labor | 50 | ||
| Overhead (fixed and variable) | 75 | ||
| Total | $ | 163 | |
The required volume of output to produce the motors will not require any incremental fixed overhead. Incremental variable overhead cost is $21 per motor. What is the effect on income if Derby decides to make the motors?
Multiple Choice
Income will decrease by $23 per unit.
Income will decrease by $16 per unit.
Income will increase by $16 per unit.
Income will increase by $23 per unit.
Income will increase by $39 per unit.
Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. Chang should:
Multiple Choice
Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
Correct the defects and sell the units at the regular price.
Sell the units to the salvage company for $5 per unit.
Throw the units away.
Sell 1,000 units to the salvage company and repair the remainder.
Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesalerâs name and would not affect Bluebirdâs sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental costwill be:
Multiple Choice
$33,750.
$38,750.
$7,500.
$45,000.
$11,250.
Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:
Multiple Choice
$96,000.
$ 2,000.
$ 8,000.
$ 6,000.
$98,000.
The Mad Hatter Company owns a machine that manufactures two types of chimney caps. Production time is .20 hours for cap A and .40 hours for cap B. The machine's capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company's output up to a maximum of 1,000 units of cap A and 6,000 units of cap B. Selling prices and variable costs per unit are shown below. Based on this information, what is the Mad Hatter's most profitable sales mix?
| Cap A | Cap B | ||||||
| Selling price per unit | $ | 80 | $ | 60 | |||
| Variable costs per unit | 53 | 42 | |||||
Multiple Choice
1,000 units of cap A and 4,500 units of cap B.
10,000 units of cap A.
1,000 units of cap A and 6,000 units of cap B.
5,000 units of cap B.
1,000 units of cap A and 5,000 units of cap B.
A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental income (loss) from rebuilding?
Multiple Choice
$3.00 per unit.
$(0.60) per unit.
$7.00 per unit.
$0.60 per unit.
$(3.00) per unit.
