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

1)	The first step is to find the Cost of goods manufactured and the Cost of goods sold:
	COST OF GOODS MANUFACTURED
	Beginning balance of WIP		70000
	Direct materials used:
	Beginning balance of raw materials	17000
	Add: Purchases of raw materials	190000
	Raw materials available for use	207000
	Less: Ending balance of raw materials	42000
	Direct materials used		165000
	Direct labor		90000
	Factory overhead:
	Rent on facilities (40000*80%)	32000
	Insurance (8000*75%)	6000
	Utilities (50000*90%)	45000
	Indirect labor	108000
	Depreciation, factory equipment	12000
	Maintenance, factory	7000
	Total manufacuring overhead		210000
	Total manufacturing cost		535000
	Less: Ending balance of WIP		85000
	Cost of goods manufactured		450000
	COST OF GOODS SOLD
	Beginning stock of FG		20000
	Cost of goods manufactured		450000
	Cost of goods available for sale		470000
	Less: Ending stock of FG		60000
	Cost of goods sold		410000
2)	The next step is to prepare the Income Statement.
	INCOME STATEMENT
	Sales		600000
	Less: COGS		410000
	Gross profit		190000
	Operating expenses:
	Selling and administrative salaries	35000
	Rent on facilities (40000*20%)	8000
	Insurance (8000*25%)	2000
	Depreciation, sales equipment	10000
	Utilities (50000*10%)	5000
	Advertising	80000
	Total operating expenses		140000
	Net operating income		50000
3)	RECOMMENDATION:
	As there was operating profit in June, the company can continue operations.