The demand for solvent, one of numerous products manufactured by Mathews 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 May 1, one month hence. 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 April or to suspend the manufacture of solvent until May 1. The controller has assembled the following pertinent data:

Mathews Industries Inc.

Income Statement—Solvent

For the Month Ended March 31, 2011

Sales (2,500 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$175,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,500

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,500

Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . 36,600

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ (18,100)

The production costs and selling and administrative expenses, based on production of 2,500 units in March, are as follows:

Direct materials ..................$27.30 per unit

Direct labor ................... 9.50 per unit

Variable manufacturing cost ........... 9.00 per unit

Variable selling and administrative expenses ...... 5.00 per unit

Fixed manufacturing cost ............. 42,000 for March

Fixed selling and administrative expenses ...... 24,100 for March

Sales for April are expected to drop about 25% 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 solvent. The inventory of solvent at the beginning and end of April is expected to be inconsequential.

Instructions

1. Prepare an estimated income statement in absorption costing form for April for solvent, assuming that production continues during the month. Round amounts to two decimals.

2. Prepare an estimated income statement in variable costing form for April for solvent, assuming that production continues during the month. Round amounts to two decimals.

3. What would be the estimated loss in income from operations if the solvent production were temporarily suspended for April?

4. What advice should the controller give to management?