Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells 22,125 tons of its granular. Because of this years mild winter, projected demand for its product is only 17,700 tons. Based on projected production and sales of 17,700 tons, the company estimates the following income using absorption costing.

Sales (17,700 tons at $116 per ton)	$ 1,380,000
Cost of goods sold (17,700 tons at $60 per ton)	1,062,000
Gross profit	318,000
Selling and administrative expenses	318,000
Income	$ 0

Its product cost per ton follows and consists mainly of fixed overhead because its automated production process uses expensive equipment.

Direct materials	$ 13	per ton
Direct labor	$ 4	per ton
Variable overhead	$ 3	per ton
Fixed overhead ($708,000/17,700 tons)	$ 40	per ton

Selling and administrative expenses consist of variable selling and administrative expenses of $6 per ton and fixed selling and administrative expenses of $211,800 per year. The companys president will not earn a bonus unless a positive income is reported. The controller mentions that because the company has large storage capacity, it can report a positive income by setting production at the usual 22,125 ton level even though it expects to sell only 17,700 tons. The president is surprised that the company can report income by producing more without increasing sales.

Required:

1. Prepare an income statement using absorption costing based on production of 22,125 tons and sales of 17,700 tons. Can the company report a positive income by increasing production to 22,125 tons and storing the 4,425 tons of excess production in inventory?
2. By how much does income increase by when producing 22,125 tons and storing 4,425 tons in inventory compared to only producing 17,700 tons?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Prepare an income statement using absorption costing based on production of 22,125 tons and sales of 17,700 tons. Can the company report a positive income by increasing production to 22,125 tons and storing the 4,425 tons of excess production in inventory? Note: Round your answers to the nearest whole dollar.

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BLAZER CHEMICAL
Income Statement (Absorption Costing)
Did the company report a positive income?

• Required 1
• By how much does income increase by when producing 22,125 tons and storing 4,425 tons in inventory compared to only producing 17,700 tons?

Increase in income