PROBLEM 2-22 Schedule of Cost of Goods Manufactured; Income Statement [LO1, LO2, LO3, L04] Veekay Company was organized on November 1 of the previous year. After seven months of start-up losses, management had expected to earn a profit during June, the most recent month. Management was disap- pointed, however, when the income statement for June also showed a loss. June's income statement follows: VEEKAY COMPANY Income Statement For the Month Ended June 30 $660,000 Sales ................ Less operating expenses: Selling and administrative salaries . . . . . . . . . . . . . . . . . . . . . . . Rent on facilities ............. Purchases of raw materials .......... Insurance..................... Depreciation, sales equipment ....... Utilities costs.... Indirect labour..... Direct labour ................ Depreciation, factory equipment...... Maintenance, factory.......... Advertising ....... Operating loss......... $ 39,000 40,000 209,000 10,000 11,000 55,000 119,000 99,000 13,000 8,000 88,000 691,000 $(31.000) After seeing the $31,000 loss for June, Veekay's president stated, "I was sure we'd be profitable within six months, but after eight months we're still spilling red ink. Maybe it's time for us to throw in the towel. To make matters worse, I just heard that Debbie won't be back from her surgery for at least six more weeks." Debbie is the company's controller; in her absence, the statement above was prepared by a new as- sistant who has had little experience in manufacturing operations. Additional information about the company follows: a. Only 85% of the rent on facilities applies to factory operations, the remainder applies to selling and administrative activities. Chapter 2 Cost Terms, Concepts, and Classifications b. Inventory balances at the beginning and end of June were as follows: June 1 Raw materials ........................................... Work in process. ... Finished goods ......... .. . $19,000 77,000 22,000 June 30 $46,000 94,000 66,000 c. Some 90% of the insurance and 80% of the utilities cost apply to factory operations, the remaining amounts apply to selling and administrative activities. The president has asked you to check over the above income statement and recommend whether the company should continue operations. Required: 1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for June. 2. As a second step, prepare a new income statement for the month. 3. Based on your statements prepared in (1) and (2) above, would you recommend that the company continue operations? hours? PROBLEM 3-16 Cost Behaviour: High-Low Method; Contribution Format Income Statement (L01, LO2, LO3] Skate World is a merchandising company that sells skateboards both at its retail store and its online store. Results for the most recent three months are shown below. July August September 4.000 $400.000 240,000 160,000 4,500 $450,000 270,000 180,000 5.000 $500,000 300,000 200,000 Sales in units ........ Sales.......................... Cost of goods sold ... Gross margin ........ Selling and administrative expenses Advertising expense. Shipping expense... Salaries and commissions. Insurance expense ............ Depreciation expense....... Total selling and administrative..... Operating income......... 21,000 34.000 78,000 6,000 15,000 154,000 $ 6,000 21,000 36,000 84.000 6,000 15.000 162.000 $ 18,000 21,000 38,000 90,000 6,000 15,000 170,000 $ 30,000 CHECK FIGURE Variable shipping expense-$4 per unit; Variable salaries and commissions expense-$12 per unit; Contribution margin-$120,000. Required: 1. Identify each of the company's expenses (including cost of goods sold) as either variable, fixed, or mixed. 2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. 3. Redo the company's income statement for September using the contribution format. PROBLEM 3-17 High-Low Method; Predicting Cost [LOI, LO2]