Question: The demand for aloe vera hand lotion one of numerous

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 March 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 February or to suspend the manufacture of aloe vera hand lotion until March 1. The controller has assembled the following pertinent data:


The production costs and selling and administrative expenses, based on production of 400,000 units in January, are as follows:
Direct materials .................$ 15 per unit
Direct labor ..................... 17 per unit
Variable manufacturing cost ............... 35 per unit
Variable selling and administrative expenses ...... 10 per unit
Fixed manufacturing cost .......... $ 1,530,000 for January
Fixed selling and administrative expenses ..... 270,000 for January
Sales for February 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 February is expected to be inconsequential.

Instructions
1. Prepare an estimated income statement in absorption costing form for February for aloe vera hand lotion, assuming that production continues during the month.
2. Prepare an estimated income statement in variable costing form for February for aloe vera hand lotion, assuming that production continues during the month.
3. What would be the estimated loss in income from operations if the aloe vera hand lotion production were temporarily suspended for February?
4. What advice should the controller give tomanagement?
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  • CreatedJune 27, 2014
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