I was sure that when our battery hit the market it would be an instant success, said Roger Strong, founder and president of Solar Technology, Inc. But just look at the gusher of red ink for the first quarter. Its obvious that were better scientists than we are businesspeople. The data to which Roger was referring follow:

Solar Technology, Inc.

Income Statement

For the Quarter Ended March 31, 2002

Sales (32,000 batteries) $960,000

Less operating expenses:

Selling & administrative salaries $110,000

Advertising 90,000

Maintenance, production 43,000

Indirect labor cost 120,000

Cleaning supplies, production 7,000

Purchases of raw materials 360,000

Rental cost, facilities 75,000

Insurance, production 8,000

Depreciation, office equipment 27,000

Utilities 80,000

Depreciation, production equip. 100,000

Direct labor cost 70,000

Travel, salespersons 40,000

--------

Total operating expenses 1,130,000

------------

Net loss $(170,000)

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At this rate, well be out of business within a year, said Cindy Zhang, the companys accountant. But Ive double-checked these figures, so I know theyre right.

Solar Technology was organized at the beginning of the current year to produce and market a revolutionary new solar battery. The companys accounting system was set up by Margie Wallace, an experienced accountant who recently left the company to do independent consulting work. The statement above was prepared by Zhang, her assistant.

We may not last a year if the insurance company doesnt pay the $226,000 it owes us for the 8,000 batteries lost in the warehouse fire last week, said Roger. The insurance adjuster says our claim is inflated, but hes just trying to pressure us into a lower figure. We have the data to back up our claim, and it will stand up in any court.

On April 3, just after the end of the first quarter, the companys finished goods storage area was swept by fire and all 8,000 unsold batteries were destroyed. (These batteries were part of the 40,000 units completed during the first quarter.) The companys insurance policy states that the company will be reimbursed for the cost of any finished batteries destroyed or stolen. Zhang has determined this cost as follows:

Total cost for the quarter, $1,130,000

-------------------------------------------------- = $28.25 per unit

Batteries produced during the quarter, 40,000

8,000 batteries x $28.25 =$226,000

The following additional information is available on the companys activities during the quarter ended March 31:

Inventories at the beginning and end of the quarter were as follows:

Beginning of End of

The quarter the quarter

-----------------------------------------------------------------------

Raw materials 0 $10,000

Work in process 0 50,000

Finished goods 0 ?

Eighty percent of the rental cost for facilities and 90% of the utilities cost relate to manufacturing operations. The remaining amounts relate to selling and administrative activities.

REQUIRED:

1. What conceptual errors, if any, were made in preparing the income statement above?
2. Prepare a schedule of cost of goods manufactured for the first quarter.