Question

Instructions The demand for solvent, one of numerous products manufactured by Logan Industries Inc., has dropped sharply because of recent competition from a similar product. The company's chemists are currently completing tests of various new formulas, and it is anticipated that the manufacture of a superior product can be started on November 1, one month in the future No changes will be needed in the present production facilities to manufacture the new product because only the mixture of the various materials will be changed The controller has been asked by the president of the company for advice on whether to continue production during October or to suspend the manufacture of solvent until November 1 The following data have been assembled: Logan Industries Inc 5800,000.00 Income Statement-Solvent For the Morth Ended September 30 1 Sales (10,000 units) Cost of goods sold Gross profit Selling and administrative expenses Operating loss (170,000.00 $30,000.00 (100,000.00 $70,000.60) The production costs and selling and administrative expenses, based on production of 10,000 units in September, are as follows:

Answer 1

1. Estimated income statement in absorption costing

Logan Industries Inc.
Estimated Income Statement - Absorption Costing
For the month ending October 31
Sales(10,000*60%*80)		480,000
Less:Cost of goods sold
Direct materials (6,000*35)	210,000
Direct labor (6,000*24)	144,000
Variable manufacturing cost (6,000*8)	48,000
Fixed manufacturing cost	100,000
Cost of goods sold		(502,000)
Gross profit		(22,000)
Selling and administrative expenses:
Variable selling and administrative expenses (6,000*6)		(36,000)
Fixed selling and administrative expenses		(40,000)
Loss from operations		-98,000

2.Estimated income statement in variable costing

Logan Industries Inc.
Estimated Income Statement - Variable Costing
For the month ending October 31
Sales(10,000*60%*80)		480,000
Less: Variable costs:
Direct materials (6,000*35)	210,000
Direct labor (6,000*24)	144,000
Variable manufacturing cost (6,000*8)	48,000
Total variable cost of goods sold		(402,000)
Manufacturing margin		78,000
Less: Variable selling and administrative expenses (6,000*6)		(36,000)
Planned contribution margin		42,000
Less: Fixed costs
Fixed manufacturing cost		(100,000)
Fixed selling and administrative expenses		(40,000)
Total fixed costs
Loss from operations		-98,000

3.Estimated loss in income from operations if the solvent production were temporarily suspended for October.

Fixed manufacturing cost	100,000
Fixed selling and administrative expenses	40,000
Total fixed costs		140,000
Loss from operations		-140,000

4. Production of solvent should be continued. Temporary suspension of production would result in a operating loss of $140,000 compared with an operating loss of $98,000 if production continued. The result would be a savings of (140,000-98,000) $42,000