The demand for solvent, one of numerous products manufactured by Logan Industries Inc., has dropped sharply because of recent competition from a similar product. The company's chemists are currently completing tests of various new formulas, and it is anticipated that the manufacture of a superior product can be started on November 1, one month in the future. No changes will be needed in the present production facilities to manufacture the new product because only the mixture of the various materials will be changed. The controller has been asked by the president of the company for advice on whether to continue production during October or to suspend the manufacture of solvent until November 1. The following data have been assembled: Logan Industries Inc. Income Statement-Solvent For the Month Ended September 30 1 Sales (10,000 units) $800,000.00 2 Cost of goods sold (770,000.00) 3 Gross profit $30,000.00 4 Selling and administrative expenses (100,000.00) 5 Operating loss $(70,000.00) The production costs and selling and administrative expenses, based on production of 10,000 units in September, are as follows: Direct materials $35 per unit 24 per unit 8 per unit Direct labor Variable manufacturing cost Variable selling and administrative expenses Fixed manufacturing cost Fixed selling and administrative expenses 6 per unit $100,000 for September 40,000 for September Sales for October are expected to drop about 40% below those of September. No significant changes are anticipated in the fixed costs or variable costs per unit. No extra costs will be incurred in discontinuing operations in the portion of the plant associated with solvent. The inventory of solvent at the beginning and end of October is not expected to be significant (material). Required: 1. Prepare an estimated income statement in absorption costing form for October for solvent, assuming that production continues during the month.* 2. Prepare an estimated income statement in variable costing form for October for solvent assuming that production continues during the month.* 3. What would be the estimated operating loss if the solvent production were temporarily suspended for October? If a loss is incurred, enter that amount as a negative number using a minus sign. Labels and Amount Descriptions x Labels Cost of goods sold Fixed costs For the Month Ending October 31 October 31 Selling and administrative expenses Variable cost of goods sold Amount Descriptions Contribution margin Contribution margin ratio Direct labor Direct materials Fixed manufacturing cost Fixed selling and administrative expenses Gross profit Operating income Operating loss Manufacturing margin Planned contribution margin Sales Sales mix Total cost of goods sold Total fixed costs Total selling and administrative expenses Total variable cost of goods sold Variable manufacturing cost Variable selling and administrative expenses 1. Prepare an estimated income statement in absorption costing form for October for solvent, assuming that production continues during the month. Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon () will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative. Logan Industries Inc. Estimated Income Statement-Absorption Costing-Solvent Income Statement 1 2 Label) 3 4 5 6 7 8 9 (Label) 10 11 12 13 2. Prepare an estimated income statement in variable costing form for October for solvent, assuming that production continues during the month. Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (1) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative. Logan Industries Inc. Estimated Income StatementVariable Costing-Solvent (Label) 1 2 (Label) 3 4 5 6 7 8 9 10 (Label) 11 12 13 14 3. What would be the estimated operating loss if the solvent production were temporarily suspended for October? If a loss is incurred, enter that amount as a negative number using a minus sign. 4. What advice should you give to management? Production of solvent should be compared with an operating loss of Temporary suspension of production would result in an operating loss of if production is continued. The result would be a savings of
