Swift Company was organized on March 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August?s income statement follows:

The company?s controller resigned a month ago. Sam, a new assistant in the controller?s office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $14,000 loss for August, Swift?s president stated, ?I was sure we?d be profitable within six months, but our six months are up and this loss for August is even worse than July?s. I think it?s time to start looking for someone to buy out the company?s assets?if we don?t, within a few months there won?t be any assets to sell. By the way, I don?t see any reason to look for a new controller. We?ll just limp along with Sam for the time being.? Additional information about the company follows:

a. Some 50% of the utilities cost and 80% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.

b. Inventory balances at the beginning and end of August were as follows:

c. Only 75% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets.

Required:

1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in good form for August.

2. As a second step, prepare a new income statement for August.

3. On the basis of your statements prepared in parts (1) and (2), would you recommend that the company look for a buyer?

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SWIFT COMPANY Income Statement For the Month Ended August 31 Sales $530,000 Less: Operating expenses: $ 9,000 Indirect labour cost 25,000 Utilities Direct labour cost 80,000 Depreciation, factory equipment 21,000 Raw materials purchased 226,000 Depreciation, sales equipment 8,000 8,000 Insurance 80,000 Rent on facilities Selling and administrative salaries 22,000 65,000 Advertising 544,000 Net loss $(14,000) August 1 August 31 Raw materials $31,000 $78,000 Work in process 18,000 10,000 Finished goods 55,000 50,000