Variable Costing for Management AnalysisWarren / Reeve / DuchacProblem 20-2B solution |
The demand for shampoo, one of numerous products manufactured by Hardin Hair 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 March 1, one month hence. 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 February or to suspend the manufacture of shampoo until March 1. The controller has assembled the following pertinent data:
The production costs and selling and administrative expenses, based on production of 245,000 units in January, are as follows:
Sales for February are expected to drop about 30% 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 shampoo. The inventory of shampoo at the beginning and end of February is expected to be inconsequential.
1. Prepare an estimated income statement in absorption costing form for February for shampoo, assuming that production continues during the month. Enter all amounts as positive numbers. However, use the minus sign to indicate a net loss.
HARDIN HAIR CARE PRODUCTS INC.
Estimated Income Statement—Absorption Costing—Shampoo
For the Month Ending February 28, 2010
Sales $7,546,000
Cost of goods sold:
Direct materials $1,372,000
Direct labor $1,715,000
Variable manufacturing cost $3,361,400
Fixed manufacturing cost $850,000
Cost of goods sold $7,298,400
Gross profit $247,600
Selling and administrative expenses:
Variable selling and administrative expenses $960,400
Fixed selling and administrative expenses $150,000 / Total $1,110,400
Operating income (loss) $-862,800
2. Prepare an estimated income statement in variable costing form for February for shampoo, assuming that production continues during the month. Enter all amounts as positive numbers. However, use the minus sign to indicate a net loss.
HARDIN HAIR CARE PRODUCTS INC.
Estimated Income Statement—Variable Costing—Shampoo
For the Month Ending February 28, 2010
Sales $7,546,000
Variable cost of goods sold:
Direct materials $1,372,000
Direct labor $1,715,000
Variable manufacturing cost $3,361,400 / Total $6,448,400
Manufacturing margin $1,097,600
Variable selling and administrative expenses $960,400
Contribution margin $137,200
Fixed costs:
Fixed manufacturing cost $850,000
Fixed selling and administrative expenses $150,000 / Total 1,000,000
Operating income (loss) $-862,800
3. What would be the estimated loss in income from operations if the shampoo production were temporarily suspended for February?
$1,000,000
