The demand for solvent, one of numerous products manufactured by Celecia 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 July 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 June or to suspend the manutacture of solvent until July 1. The following data have been assembled: The production costs and selling and administrative expenses, based on production of 25,000 units in May, are as follows: Sales for June are expected to drop 40% below those of May to 15,000 units (25,00060%). 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 June is not expected to be significant (material). Required: 1. Prepare an estimated income statement in absarption costing form for June for saivent assuming that production continues duning the month 2. Prepare an estimated income statement in vanable costing form for June for solvent, assuming that production continues during the month 3. What would be the estimated operating lass if the solvent production were temporaniy suspended for June? 4. What advice should you give to management? Labels Cost of goods sold Fixed costs For the Month Ending June 30 June 30 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 June for solvent, assuming that production continues during the month Income Statement instructions 10 11 12 13 2. Prepare an estimated income statement in variable costing form for June for solvent, assuming that production continces during the month. income Statement instructions 11 12 15 14 3. What would be the estimated operating loss if the solvent production were temporanily suspended for June? Additional Instructions
