Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2017.

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2017

Sales revenue $780,000

Less:Operating expenses

Raw materials purchases $264,000

Direct labor cost 190,000

Advertising expense 90,000

Selling and administrative salaries 75,000

Rent on factory facilities 60,000

Depreciation on sales equipment 45,000

Depreciation on factory equipment 31,000

Indirect labor cost 28,000

Utilities expense 12,000

Insurance expense 8,000

803,000

Net loss $(23,000)

Prior to October 2017, the company had been profitable every month. The companys president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

October 1 October 31

Raw materials $18,000 $29,000

Work in process 20,000 14,000

Finished goods 30,000 50,000

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities. Prepare a letter to the president of the company, Shelly Phillips, describing the changes you made. Explain clearly why net income is different after the changes. Keep the following points in mind as you compose your letter.

1.	This is a letter to the president of a company, who is your friend. The style should be generally formal, but you may relax some requirements. For example, you may call the president by her first name.
2.	Executives are very busy. Your letter should tell the president your main results first (for example, the amount of net income).
3.	You should include brief explanations so that the president can understand the changes you made in the calculations.