SWIFT COMPANY Income Statement For the Month Ended August 31 Sales $ 505,000 Less cost of goods sold: Finished goods inventory, August 1 Add: Cost of goods manufactured Goods available for sale Deduct: Finished goods inventory, August 31 Gross margin $ 50,000 343,700 393.700 55.000 338,700 166,300 Less operating expenses Utilities 5,100 Depreciation, sales equipment 18,000 Insurance 1,000 Rent on facilities 12,500 Selling and administrative salaries 43,000 Advertising 85,700 0 165,300 Net income Swift Company was organized on March 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August's income statement follows: SWIFT COMPANY Income Statement For the Month Ended August 31 Sales Less: Operating expenses: Indirect labour cost Utilities Direct labour cost Depreciation, factory equipment Raw materials purchased Depreciation, sales equipment Insurance Rent on facilities $505,000 $ 15,300 17,000 59,000 26,000 198,000 18,000 4,000 50,000 Selling and administrative salaries 43,000 Advertising 85,700 Net loss 516,000 $(11,000) The company's controller resigned a month ago. Sam, a new assistant in the controller's office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $11,000 loss for August, Swift's president stated, "I was sure we'd be profitable within six months, but our six months are up and this loss for August is even worse than July's. I think it's time to start looking for someone to buy out the company's assets-if we don't, within a fermenthe there won'the assets to cell Buthe way I don't see any reason to look for a new controller We'll just limp ces The company's controller resigned a month ago. Sam, a new assistant in the controller's office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $11,000 loss for August, Swift's president stated, "I was sure we'd be profitable within six months, but our six months are up and this loss for August is even worse than July's. I think it's time to start looking for someone to buy out the company's assets--if we don't, within a few months there won't be any assets to sell. By the way, I don't see any reason to look for a new controller. We'll just limp along with Sam for the time being." Additional information about the company follows: a. Approximately 70% of the utilities cost and 75% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities. b. Inventory balances at the beginning and end of August were as follows: Raw materials Work in process Finished goods August 15 August 31 $17,000 $13,000 8,000 50,000 19,000 55,000 c. Only 75% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities. The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets. Direct materials: SWIFT COMPANY Schedule of Cost of Goods Manufactured For the Month Ended August 31 Raw materials inventory, August 1 17,000 Add: Purchases of raw materials 198,000 Raw materials available for use 215,000 Deduct: Raw materials inventory, August 31 13,000 Raw materials used in production $ 202,000 Direct labour 59,000 Manufacturing overhead: Depreciation, factory equipment 26,000 Rent on facilities Utilities Insurance Indirect labour Total overhead costs Total manufacturing costs 37,500 11,900 3,000 15,300 0 93,700 354,700 Add: Work in process inventory, August 1 8,000 Total work in process inventory 362,700 Deduct: Work in process inventory, August 31 19,000 Cost of goods manufactured 343,700 2. As a second step, prepare a new income statement for August. SWIFT COMPANY Income Statement For the Month Ended August 31 Sales $ 505,000 Less cost of goods sold: Finished goods inventory, August 1 Add: Cost of goods manufactured Goods available for sale. Deduct Finished goods inventory, August 31 Gross margin $ 50,000 343,700 393,700 55,000 338,700 166,300 Less operating expenses: Utilities 5,100 Depreciation, sales equipment 18,000 1,000 Insurance Rent on facilities: 12,500 Selling and administrative salaries 43,000 Advertising 85,700 0 165,300 Net income 3. On the basis of your statements prepared in Requirements (1) and (2), would you recommend that the company look for a buyer? Yes No