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) Cost of goods sold (60 tons at $16,000 per ton) Gross margin Selling and administrative expenses Net loss $1,260,000 960,000 300,000 310,600 $ (18,600) 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 Fixed cost per ton (5750,000 - 60 tona) Total product cost per ton $3.500 12,500 $16.000 Selling and administrative expenses consist of variable selling and administrative expenses of $310 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 not 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.

Answer 1

Selling Price Per Ton Cost of Goods Sold Per ton Variable Direct labor and Material Per ton Fixed Overhead Cost Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses 21000 Per Ton 16000 Per Ton 3500 Per Ton 750000 310 Per ton 300000 Cost of Goods Sold Prodcution Volume 60 100 3500 3500 12500 7500 Variable Direct labor and Material Per ton Fixed Overhead Cost ((750000/60, 750000/100) 16000 11000 Cost of Goods Sold Per ton number of Tons Sold Total Cost of Goods Sold 601 60 960000 660000 SAFETY CHEMICAL Income Statement - Absorption Costing Prodcution Volumes Sales Volume-60 Tons 60 tons 100 Tons Sales 1260000 1260000 Cost of Goods Sold 960000 660000 Gross Margin 300000 600000 Selling General and Administrative Expenses -318600 -318600 Net income (Loss) -18600 281400 Under Absorption costing, can a company report a higher YES netincome amount by prodcuting more units than the sell