Question

Problem 19-3A Income reporting, absorption costing, and managerial ethics LO P2, C1

Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells about 100 tons of its granular. In its nine-year history, the company has never reported a net loss. However, because of this year's unusually mild winter, projected demand for its product is only 60 tons. Based on its predicted production and sales of 60 tons, the company projects the following income statement (under absorption costing).

Sales (60 tons at $20,500 per ton)	$	1,230,000
Cost of goods sold (60 tons at $15,500 per ton)		930,000
Gross margin		300,000
Selling and administrative expenses		318,000
Net loss	$	(18,000	)

  
Its product cost information follows and consists mainly of fixed cost because of its automated production process requiring expensive equipment.

Variable direct labor and material costs per ton	$	3,167
Fixed cost per ton ($740,000 ÷ 60 tons)		12,333
Total product cost per ton	$	15,500

Selling and administrative expenses consist of variable selling and administrative expenses of $300 per ton and fixed selling and administrative expenses of $300,000 per year. The company's president is concerned about the adverse reaction from its creditors and shareholders if the projected net loss is reported. The operations manager mentions that since the company has large storage capacity, it can report a net income by keeping its production at the usual 100-ton level even though it expects to sell only 60 tons. The president was puzzled by the suggestion that the company can report income by producing more without increasing sales.


Required:
1. Can the company report a net income by increasing production to 100 tons and storing the excess production in inventory? Complete the following income statement (using absorption costing) based on production of 100 tons and sales of 60 tons. (Round your answers to the nearest whole dollar.)

	Production volume
Cost of goods sold:	60 tons	100 tons
Cost of goods sold per unit
Number of tons sold
Total cost of goods sold
SAFETY CHEMICAL
Income statement - Absorption method
	Production volume
Sales volume - 60 tons	60 tons	100 tons
Under absorption costing, can a company report a higher net income amount by producing more units than they sell?

Answer 1

Solution:

Cost of goods sold	Production volume
60 tons	100 tons
Variable direct labor and direct material cost per unit	$3,167.00	$3,167.00
Fixed cost per unit	$12,333.00	$7,400.00
Cost of goods sold per unit	$15,500.00	$10,567.00
Nos of tons sold	60	60
Total cost of goods sold	$9,30,000.00	$6,34,020.00

Blazer Chemical
Income Statement - Absorption Method
Sales volume - 60 tons	Production volume
60 tons	100 tons
Sales	$9,30,000.00	$9,30,000.00
Cost of goods sold	$9,30,000.00	$6,34,020.00
Gross Profit	$0.00	$2,95,980.00
Selling and administrative expenses	$3,18,000.00	$3,18,000.00
Net Income	-$3,18,000.00	-$22,020.00
Under absorption costing, can a company report a higher net income by producing more units than they sell	Yes