Question

Wade Company was organized on November 1 of the previous year. After seven months of start-up losses, management had expected to earn a profit during June, the most recent month. Management was disappointed, however, when the income statement for June also showed a loss. June’s income statement follows:

Wade Company

Income Statement

For the Month Ended June 30

Sales                                                                                                    $600,000

Less-operating expenses                                            

Selling and administrative salaries                         $ 35,000

Rent on facilities                                                         40,000

Purchases of raw materials                                        190,000

Insurance                                                                     8,000

Depreciation, sales equipment                                    10,000

Utilities costs                                                              50,000

Indirect labor                                                             108,000

Direct labor                                                                 90,000

Depreciation, factory equipment                                12,000

Maintenance, factory                                                  7,000

Advertising                                                                 80,000             630,000

Net operating loss                                                                               $(30,000)

After seeing the $30,000 loss for June, Wade’s president stated, “I was sure we would be profitable within six months, but after eight months we’re still spilling red ink. Maybe it is time for us to throw in the towel and accept one of those offers we have had for the company. To make matters worse, I just heard that Linda won’t be back from her surgery for at least six more weeks.”

Linda is the company’s controller. In her absence, the statement above was prepared by a new assistant, who has little experience in manufacturing operations. Additional information about the company follows:

• Only 80% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.
• Inventory balances at the beginning and end of the month were as follows:

                                                 June 1                         June 30

Raw materials                          $17,000                       $42,000

Work in process                      $70,000                       $85,000

Finished goods                        $20,000                       $60,000

• 75% of the insurance and 90% of the utilities cost apply to factory operations; the remaining amounts apply to selling and administrative activities.

Based on the information given above, determine the true operating income or loss. Make a recommendation as to whether the company should continue operations.

Answer 1

Therefore, the operating income is $50,000.

It is recommended to continue the operation because there is no loss as the true operating income is $50,000.

Workings: