Response to the following problem:
Early in the year, John Raymond founded Raymond Engineering Co. for the purpose of manufacturing a special flow control valve that he had designed. Shortly after year-end, the company's accountant was injured in a skiing accident, and no year-end financial statements were prepared. However, the accountant had correctly determined the year-end inventories at the following amounts:
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,500
Finished goods (3,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,500
As this was the first year of operations, there were no beginning inventories.
While the accountant was in the hospital, Raymond improperly prepared the following income statement from the company's accounting records:
Net sales $610,600
Cost of goods sold:
Purchases of direct materials $181,000
Direct labor costs 110,000
Manufacturing overhead 170,000
Selling expenses 70,600
Administrative expenses 132,000
Total costs 663,600
Net loss for year $ (53,000)
Raymond was very disappointed in these operating results. He stated, "Not only did we lose more than $50,000 this year, but look at our unit production costs. We sold 10,000 units this year at a cost of $663,600; that amounts to a cost of $66.36 per unit. I know some of our competitors are able to manufacture similar valves for about $35 per unit. I don't need an accountant to know that this business is a failure."
Instructions
a. Prepare a schedule of the cost of finished goods manufactured for the year. (As there were no beginning inventories, your schedule will start with "Manufacturing costs assigned to production:".) Show a supporting computation for the cost of direct materials used during the year.
b. Compute the average cost per unit manufactured.
c. Prepare a corrected income statement for the year, using the multiple-step format. If the com- pany has earned any operating income, assume an income tax rate of 30 percent. (Omit earn- ings per share figures.)
d. Explain whether you agree or disagree with Raymond's remarks that the business is unprofit- able and that its unit cost of production ($66.36, according to Raymond) is much higher than that of competitors (around $35). If you disagree with Raymond, explain any errors or short- comings in his analysis.