Question
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
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. Augusts income statement follows: |
SWIFT COMPANY Income Statement For the Month Ended August 31 | ||||
Sales | $ | 490,000 | ||
Less: Operating expenses: | ||||
Indirect labour cost | $ | 14,400 | ||
Utilities | 16,000 | |||
Direct labour cost | 62,000 | |||
Depreciation, factory equipment | 23,000 | |||
Raw materials purchased | 189,000 | |||
Depreciation, sales equipment | 18,000 | |||
Insurance | 3,400 | |||
Rent on facilities | 47,000 | |||
Selling and administrative salaries | 40,000 | |||
Advertising | 86,700 | 499,500 | ||
Net loss | $ | (9,500) | ||
The companys controller resigned a month ago. Sam, a new assistant in the controllers office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $9,500 loss for August, Swifts president stated, I was sure wed be profitable within six months, but our six months are up and this loss for August is even worse than Julys. I think its time to start looking for someone to buy out the companys assetsif we dont, within a few months there wont be any assets to sell. By the way, I dont see any reason to look for a new controller. Well just limp along with Sam for the time being. |
Additional information about the company follows: |
a. | Some 70% of the utilities cost and 70% 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: |
August 1 | August 31 | |||
Raw materials | $ | 24,000 | $ | 21,000 |
Work in process | 8,000 | 22,000 | ||
Finished goods | 47,000 | 52,000 | ||
|
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. |
Required: |
1. | As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in good form for August. |
2. | As a second step, prepare a new income statement for August. |
3. | On the basis of your statements prepared in parts (1) and (2), would you recommend that the company look for a buyer? | ||||
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