Reference no: EM132951114

Veekay Company was organized on November 1 of the previous year. After seven months of start-up losses, management had expected to earn a profit during June, the most recent month. Management was disappointed, however, when the income statement for June also showed a loss.

June's income statement follows.

Sales $660,000
Less operating expenses
Selling and administrative salaries $ 39,000
Rent on facilities 40,000
Purchases of raw materials 219,000
Insurance 10,000
Depreciation, sales equipment 11,000
Utilities costs 55,000
Indirect labour 119,000
Direct labour 99,000
Depreciation factory equipment 13,000
Maintenance factory 8,000
Advertising 80,000 691,000
Operating loss $(31,000)

After seeing the $31,000 loss for June, Veekay's president stated, "I was sure we'd be profitable within six months, but after eight months we're still spilling red ink. Maybe it's time for us to throw in the towel. To make matters worse, I just heard that Debbie won't be back from her surgery for at least six more weeks."

Debbie is the company's controller; in her absence, the statement above was prepared by a new assistant who has had little experience in manufacturing operations. Additional information about the company follows:

a. Only 85% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

b. Inventory balances at the beginning and end of June were as follows:

                             June 1                June 30

Raw materials           $19,000            $46,000
Work in process .         $77,000           $94,000
Finished goods             $22,000           $76,000

c. Some 90% of the insurance and 80% of the utilities cost apply to factory operations; the remaining amounts apply to selling and administrative activities.

The president has asked you to check over the above income statement and make a recommendation as to whether the company should continue operations.

Required:

Problem 1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for June.

Problem 2. As a second step, prepare a new income statement for the month.

Problem 3. Based on your statements prepared in (1) and (2) above, would you recommend that the company continue operations?