Blazer Chemical produces and sells an ice-melting granular used on roadways and
ID: 2336032 • Letter: B
Question
Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and about 100 tons of its granular. In its nine-year history, the company has never reported a net loss. However, because of unusually mild winter, projected demand for its product is only 65 tons. Based on its predicted production and sales of 65 tons, company projects the following income statement (under absorption costing) the Sales (65 tons at $20,500 per ton) Cost of goods sold (65 tons at $15, 500 per ton) Gross margin Selling and administrative expenses Net loss $1,332,500 1,007, s00 325,000 345,150 s (20,150) Its product cost information follows and consists mainly of fixed cost because of its automated production process requiring expensive equipment. Variable direct labor and materal costs per ton Fixed cost per ton ($760,000 ÷ 65 tons) Total product cost per ton s 3,808 11, 692 $15,500 Selling and administrative expenses consist of variable selling and administrative expenses of $310 per ton and fixed selling and administrative expenses of $325,000 per year. The company's president is concerned about the adverse reaction from its creditors shareholders if the projected net loss is reported. The operations manager mentions that since the company has large storage and capacity, The president was puzzled by the suggestion that the company can report income by producing more without increasing sales. it can report a net income by keeping its production at the usual 100-ton level even though it expects to sell only 65 tons Required rductiont 100 tons and storing the excess production in inventory?Explanation / Answer
production in tons
65 tons
100 tons
variable cost per ton
15500*65
3808
3808
fixed cost per ton
760000/65
11692
760000/100
7600
cost of goods sold
15500
11408
number of units sold
65
65
total cost of goods sold
15500*65
1007520
11408*65
741520
Inocome statement
65 tons
100 tons
sales
65*20500
1332500
65*20500
1332500
cost of goods sold
1007520
741520
gross margin
324980
590980
less selling and administrative expenses
(310*65)+325000
345150
345150
net profit/loss
-20170
245830
Yes
production in tons
65 tons
100 tons
variable cost per ton
15500*65
3808
3808
fixed cost per ton
760000/65
11692
760000/100
7600
cost of goods sold
15500
11408
number of units sold
65
65
total cost of goods sold
15500*65
1007520
11408*65
741520
Inocome statement
65 tons
100 tons
sales
65*20500
1332500
65*20500
1332500
cost of goods sold
1007520
741520
gross margin
324980
590980
less selling and administrative expenses
(310*65)+325000
345150
345150
net profit/loss
-20170
245830
Yes
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