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 70 tons. Based on its predicted production and sales of 70 tons, the company projects the following income statement (under absorption costing).

Sales (70 tons at $20,000 per ton)	$	1,400,000
Cost of goods sold (70 tons at $15,000 per ton)		1,050,000
Gross margin		350,000
Selling and administrative expenses		373,100
Net loss	$	(23,100	)

  
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	$	4,429
Fixed cost per ton ($740,000 ÷ 70 tons)		10,571
Total product cost per ton	$	15,000

Selling and administrative expenses consist of variable selling and administrative expenses of $330 per ton and fixed selling and administrative expenses of $350,000 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 70 tons. The president is puzzled by the suggestion that the company can report income by producing more without increasing sales.

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 70 tons. (Round your answers to the nearest whole dollar.)

Production volume 70 tons 100 tons Cost of goods sold: Cost of goods sold per unit Number of tons sold Total cost of goods sold BLAZER CHEMICAL Income statement - Absorption method Production volume 70 tons 100 tons Sales volume - 70 tons

Answer 1

Cost of Goods Sold Prodcution Volume 70 100 4429 4429 10571 7400 Variable Direct labor and Material Per ton Fixed Overhead Cost ((740000/70, 740000/100) | Cost of Goods Sold Per ton number of Tons Sold Total Cost of Goods Sold 15000 701 1050000 11829 70 828030 Blazer CHEMICAL Income Statement - Absorption Costing Prodcution Volumes Sales Volume-70 Tons 70 tons 100 Tons Sales 1400000 1400000 Cost of Goods Sold 1050000 828030 Gross Margin 350000 571970 Selling General and Administrative Expenses -373100-373100 Net income (Loss) -23100 198870