The demand for shampoo, one of numerous products manufactured by Hardin Hair 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 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 February or to suspend the manufacture of shampoo until March 1. The controller has assembled the following pertinent data:

Hardin Hair Care Products Inc.

Income Statement—Shampoo

For the Month Ended January 31, 2010

Sales (245,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,780,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,062,000

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 718,000

Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 1,522,000

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (804,000)

The production costs and selling and administrative expenses, based on production of 245,000 units in January, are as follows:

Direct materials ............... $ 8.00 per unit

Direct labor ................ 10.00 per unit

Variable manufacturing cost .......... 19.60 per unit

Variable selling and administrative expenses .... 5.60 per unit

Fixed manufacturing cost ..........850,000 for January

Fixed selling and administrative expenses ...... 150,000 for January

Sales for February are expected to drop about 30% 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 shampoo. The inventory of shampoo 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 shampoo, assuming that production continues during the month.

2. Prepare an estimated income statement in variable costing form for February for shampoo, assuming that production continues during the month.

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

4. What advice should the controller give to management?