Income Statements under Absorption Costing and Variable Costing The demand for aloe vera hand lotion, one of numerous products manufactured by Smooth Skin Care Products 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 December 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 November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data: Smooth Skin Care Products Inc. Income Statement-Aloe Vera Hand Lotion For the Month Ended October 31 Sales (400,000 units) $32,000,000 Cost of goods sold (28,330,000) Gross profit $3,670,000 (4,270,000) Selling and administrative expenses Operating loss $(600,000) The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows: Direct materials $15 per unit Direct labor 17 per unit 35 per unit Variable manufacturing cost Variable selling and administrative expenses 10 per unit $1,530,000 for October Fixed manufacturing cost Fixed selling and administrative expenses 270,000 for October Fixed manufacturing cost $1,530,000 for October Fixed selling and administrative expenses 270,000 for October Sales for November are expected to drop about 20% below those of the preceding month. 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 aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential. Required: 1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month. Smooth Skin Care Products Inc. Estimated Income Statement-Absorption Costing-Aloe Vera Hand Lotion For the Month Ending November 30 Sales Cost of goods sold: Variable cost of goods manufactured Selling and administrative expenses: Variable selling and administrative expenses Fixed selling and administrative expenses Total selling and administrative expenses Fixed selling and administrative expenses Total selling and administrative expenses Operating income 2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month. Smooth Skin Care Products Inc. Estimated Income Statement-Variable Costing-Aloe Vera Hand Lotion For the Month Ending November 30 Variable cost of goods sold: 000 0 DO Fixed costs: Fixed costs: Operating income 3. What would be the estimated operating loss if the aloe vera hand lotion production were temporarily suspended for November? 4. What advice should the controller give to management? Production of A.V. lotion should be compared with an 1. Temporary suspension of production would result in an operating loss of if production is continued. The result would be a savings of operating loss of
