Swift Company was organized on March 1 of the current year. After five months of start-up losses, management had expected to earn a profit during August. Management was disappointed, however, when the income statement for August also showed a loss. August's income statement follows:
Swift Company
Income Statement
For the Month Ended August 31
Sales .......................................................................................................... $450,000
Less operating expenses:
Direct labor cost .............................................................. $ 70,000
Raw materials purchased ................................................. 165,000
Manufacturing overhead .................................................... 85,000
Selling and administrative expenses.. ............................... 142,000......... 462,000
Net operating loss ...................................................................................... $ (12,000)
After seeing the $12,000 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."
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. Inventory balances at the beginning and end of August were:
.............................................August 1............ August 31
Raw materials ....................................... $8,000............... $13,000
Work in process .................................. $16,000............... $21,000
Finished goods .................................... $40,000.............. $60,000
The president has asked you to check over the income statement and make a recommendation as to 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 for August.
2. As a second step, prepare a new income statement for August.
3. Based on your statements prepared in (1) and (2) above, would you recommend that the company look for a buyer?