Early in the year, Jane Jackson founded Jackson Engineering Co. for the purpose of manufacturing a special plumbing device that she had designed. Shortly after year-end, the companys accountant was injured in an auto accident, and no year-end financial statements were prepared. However, the accountant had correctly determined the year-end inventories at the following amounts.

Ending Inventory

Beginning Inventory

Materials

51,000

-

Work in process

32,000

-

Finished goods (4,000 units)

108,000

-

As this was the first year of operations, there were no beginning inventories

While the accountant was in the hospital, Jackson improperly prepared the following income statement from the company's accounting records:

Net sales

625,000

Cost of goods sold:

Purchases of direct materials

188,000

Direct labor costs

113,000

Manufacturing overhead

160,000

Selling expenses

75,000

Administrative expenses

135,000

Total costs

671,000

Net loss for year

(46,000)

Jackson was very disappointed in these operating results. She stated, Not only did we lose more than 40,000 this year, but look at our unit production costs. We sold 10,000 units this year at a cost of 671,000; that amounts to a cost of 67.10 per unit. I know some of our competitors are able to manufacture similar plumbing devices for about 30 per unit. I dont need an accountant to know that this business is a failure.

Instructions

If the company has earned any operating income, assume an income tax rate of 20 percent. (Omit earnings per share figures.)

d. Explain whether you agree or disagree with Jacksons remarks that the business is unprofitable and that its unit cost of production (67.10, according to Jackson) is much higher than that of competitors (around 30). If you disagree with Jackson, explain any errors or shortcomings in her analysis.

Net loss calculated by Raymond	(46,000)
Add: Product costs erroneously deducted as expense	191,000
Actual operating income	145,000
Less: Income taxes (ignored by Raymond)	(29,000)
Actual net income	116,000