Question

Swift Company was organized on March 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August’s income statement follows:

SWIFT COMPANY Income Statement For the Month Ended August 31
Sales			$	495,000
Less: Operating expenses:
Indirect labour cost	$	14,700
Utilities		16,000
Direct labour cost		61,000
Depreciation, factory equipment		24,000
Raw materials purchased		192,000
Depreciation, sales equipment		18,000
Insurance		3,600
Rent on facilities		48,000
Selling and administrative salaries		41,000
Advertising		86,700		505,000
Net loss			$	(10,000)

The company’s controller resigned a month ago. Sam, a new assistant in the controller’s office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $10,000 loss for August, Swift’s president stated, “I was sure we’d be profitable within six months, but our six months are up and this loss for August is even worse than July’s. I think it’s time to start looking for someone to buy out the company’s assets—if we don’t, within a few months there won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just limp along with Sam for the time being.”

Additional information about the company follows:

a.	Some 70% of the utilities cost and 70% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.
b.	Inventory balances at the beginning and end of August were as follows:

	August 1		August 31
Raw materials	$	25,000	$	22,000
Work in process		8,000		23,000
Finished goods		48,000		53,000

  

c.	Only 75% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets.

Required:

1.	As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in good form for August.

      

2.	As a second step, prepare a new income statement for August.

     

3.	On the basis of your statements prepared in parts (1) and (2), would you recommend that the company look for a buyer?
	Yes No

Answer 1

Question 1: Please go through the attachment

Question 2: Please go through the attachment

Question 3: The New income statement shows an operating income of 7,000.

So, It is recommended that the company to look for a buyer.

Reason for change in income: There is an opening and closing inventory of goods which affects the profit.

a) Schedule of Cost of goods manufactured b) Multiple step Income statement PARTICULARS Amount $ Amount $ Amount $ Amount $ PARTICULARS Raw Material: Sales 495000 Opening Inventory la 25,000.00 Less: Cost of Goods sold Cost of Goods Manufactured + Finished goods opening Inventory Finished goods Ending Inventory + Purchases 1,92,000.00 3,29,420 a+b=c Raw Material Available for use 2,17,000.00 48000 Closing Inventory Cost of Raw Material used: Direct Labour 22,000.00 -53000 e=c-d e=b+c-d Cost of goods sold 1,95,000.00 3,24,420 3,24,420 Gross Profit f=a-e 1,70,580 61,000.00 Prime Cost 2,56,000 Less: Operating Expenses g=e+f 2,56,000.00 Manufacturing Overhead: Depreciation, Sales Equipment 18000 Indirect Labor Cost Selling and administrative salaries 41000 14700 li 86700 Utilities=70%*16000 Advertising 11200 Depreciation, Factory equipment 24000 2520 36000 88420 Utilities =30%*16000 4800 Insurance =70%*3600 Rent on Facilities=75%*48000 Total Manufacturing Overheads + Work in Process Opening Inventory Insurance=30%*3600 1080 Rent on Facilities=25%*48000 12000 m= h to l Total Administrative and selling expenses 88,420 163580 163580 8,000 h=f-g Operating Income 7,000 - Work in Process Closing Inventory -23,000 p=g+m+n-o Cost of Goods Manufactured 3,29,420