B & B Manufacturing Co. was organized on January 1 of the current year. Outside investors who financed the business stipulated that the company must show a profit by the sixth month or the financing will be stopped. B & B reported losses for the first four months, but expected to show a profit in the fifth (the current) month. After reviewing the income statement for the fifth month (May), the president, Craig, was disappointed with the performance and called an employee meeting. At the meeting, Craig informed the employees that based on the performance for the first five months and in particular the month of May, he saw very little hope of a profit by the sixth month. He also informed the employees that they should prepare to close the business. After the meeting, the controller quit, leaving you in charge of the accounting function. The latest financial information is as follows:

Seventy-five percent of utilities, depreciation, insurance, and rent are related to production operations, whereas 25 percent of those costs are related to selling and administrative activities.

Required
A. Prepare the income statement for May based on the information provided previously. (Include a statement of cost of goods manufactured and a statement of cost of goods sold.)
B. Do you agree with the president’s assessment of the situation? Why or why not?
C. How will you explain to the investors why your income statement is different from the one prepared by thecontroller?

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B & B Manufacturing Co. Income Statement For the Month Ended May 31 Sales $325,000 Less: Raw materials purchased $140,000 75,000 10,000 25,000 30,000 15,000 12,000 30,000 25,000 Direct labor Indirect labor Utilities Depreciation Insurance Rent Selling & administrative Advertising 362,000 Net loss $(37,000) Other Information May 1 May 31 Inventory Raw materials Work in process Finished goods Balance $30,000 22,000 70,000 Balance $10,000 15,000 50,000