044 Chapter 20 Variable Costing for Management Analysis 2. Contribution margin, $960,000 e costing Obj. 1.2 factured by Smooth Skin com a similar product ulas, and it is antici ember 1, one month in manufacture the new dvice on whether to aloe vera hand lotion PR 20-2B Income statements under absorption costing and variable costin The demand for aloe vera hand lotion, one of numerous products manufacture Care Products Inc., has dropped sharply because of recent competition from a The company's chemists are currently completing tests of various new formulas pated that the manufacture of a superior product can be started on December the future. No changes will be needed in the present production facilities to manufa 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 continue production during November or to suspend the manufacture of aloe vera 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) ............... $32,000,000 Cost of goods sold ............ 28,330,000 Gross profit ................ $ 3,670,000 Selling and administrative expenses ........... 4,270,000 Loss from operations ... $ 600,000 The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows: Direct materials $15 per unit Direct labor 17 per unit Variable manufacturing cost 35 per unit Variable selling and administrative expenses 10 per unit Fixed manufacturing cost $1,530,000 for October Fixed selling and administrative expenses 270,000 for October 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. Instructions 1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month. 2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month. 3. What would be the estimated loss in income from operations if the aloe vera hand production were temporarily suspended for November? What advice should the controller give to management