Question

Income Statements under Absorption Costing and Variable Costing The demand for aloe vera hand lotion, one of numerous products manufactured by Smooth Skin Care Products 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 December 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 November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data Smooth Skin Care Products Inc. Income Statement-Aloe Vera Hand Lotion For the Month Ended October 31 Sales (400,000 units) Cost of goods sold Gross profit Selling and administrative expenses Loss from operations The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows Direct materials Direct labor Variable manufacturing cost Variable selling and administrative expenses Fixed manufacturing cost Fixed selling and administrative expenses Sales for November are expected to drop about 20% below those of the preceding month. No significant changes are anticipated in the fixed costs or variable costs per unit. No extra costs will be incurred in discontinuing operations in the portion of the plant associated with aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential Required: $32,000,000 28,330,000 $3,670,000 4,270,000 $(600,000) $15 per unit 17 per unit 35 per unit 10 per unit $1,530,000 for October 270,000 for October 1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month Smooth Skin Care Products Inc. Estimated Income Statement-Absorption Costing-Aloe Vera Hand Lotion For the Month E November 30 Sales 32,000,000 Cost of goods sold: Direct materials Direct labor Variable manufacturing cost Fixed manuf cost Total cost of goods sold Gross profit Selling and administrative expenses: Variable selling and administrative expenses Fixed s and administrative expenses Fixed cost of goods manufactured Loss from operations 2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month. Smooth Skin Care Products Inc. Estimated Income Statement-Variable Costing-Aloe Vera Hand Lotion For the Month Ending November 30 Sales Variable cost of goods sold: Direct materials Direct labor Estimated Income Statement-Variable Costing-Aloe Vera Hand Lotion For the Month Ending November 30 Sales ariable cost of goods sold: Direct materials Direct labor Variable manufacturing cost Total variable cost of goods sold Manufacturing margin Variable selling and administrative Contribution margin Fixed costs: Fixed manufacturing cost V Fixed selling and administrative expenses Total fixed costs Loss from operations Feedback Check My Work 2. Under variable costing, the cost of goods sold includes only variable manufacturing costs. Learning Objective 1 and Learning Objective 2. 3. What would be the estimated loss in income from operations if the aloe vera hand lotion production were temporarily suspended for November?

Answer 1

ANSWER :-

(1)

Smooth Skin Care Products Inc.
Estimated Income Statement-Absorption Costing-Aloe Vera Hand Lotion
For the Month Ending November 30, 2016
Sales (320000 x $80)		25600000.00
Cost of goods sold:
Direct materials (320000 x $15)	4800000.00
Direct labor (320000 x $17)	5440000.00
Variable manufacturing cost (320000 x $35)	11200000.00
Fixed manufacturing costs	1530000.00
Cost of goods sold		22970000.00
Gross profit		2630000.00
Selling and administrative expenses
Variable selling and administrative expenses (320000 x $10)	3200000.00
Fixed selling and administrative expenses	270000.00	3470000.00
Operating loss		-840000.00

Working:

Sales for November = 400000 x (1 - 0.20)

= 400000 x 0.80

= 320000 units

Selling price per unit = $32000000/400000 units

= $80

(2)

Smooth Skin Care Products Inc.
Estimated Income Statement-Variable Costing-Aloe Vera Hand Lotion
For the Month Ending November 30, 2016
Sales (320000 x $80)		25600000.00
Variable cost of goods sold
Direct materials (320000 x $15)	4800000.00
Direct labor (320000 x $17)	5440000.00
Variable manufacturing cost (320000 x $35)	11200000.00	21440000.00
Manufacturing margin		4160000.00
Variable selling and administrative expenses (320000 x $10)		3200000.00
Contribution margin		960000.00
Fixed costs
Fixed manufacturing costs	1530000.00
Fixed selling and administrative expenses	270000.00	1800000.00
Operating loss		-840000.00

(3)

Estimated loss in income from operations: $1,800,000.

The estimated loss in income from operations if the production of the aloe vera hand lotion were temporarily suspended in November will be $840000 + $960000

= $1800000.

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