Reference no: EM132566942

Fred Smith, owner of Smith Apple Orchards, has come to you with a question. After operating for years without trying to determine his profit or loss on the different grades of apples that he produces and sells, he hires a recent college graduate to do a profit analysis for him. Upon receiving the analysis, Fred is upset. He says, "I never took accounting, and I am not a college graduate. I hate to disagree with a report from a college accounting major that I paid for, but this says that I would be better off by dumping the number three grade of apples instead of selling them. Is that what this means?" The different grades of apples all are grown on the same trees. The grades are not identified until they are sorted into grades. Growing and harvesting costs were allocated on the basis of number of pounds sold. These were: Number Ones - 200,000 lbs.; Number Twos - 300,000 lbs., and Number Threes - 100,000 lbs. Total growing and harvesting costs were $120,000.

Question 1. What is your advice to Fred? In future harvests, should he sell the number three apples or dump them? Explain your answer by preparing an income statement as if Smith dumped the number three apples rather than sold them.

                                  Grade 1                 Grade 2                     Grade 3              Total

Sales in Pounds              200,000                300,000                  500,000

Sales in Dollars                 $100,000                $90,000                 $190,000

Less Expenses:

Packing and Shipping              $ 10,000                 $ 15,000             $ 25,000

Growing, Harvest Sor             $ 40,000                    $ 60,000              $ 20,000     $ 120,000

Total Expenses                      $ 50,000                 $ 75,000                   $ 20,000    $ 145,000

Profit or (Loss)                         $50,000                $15,000                 ($20,000)        $45,000

Difference                             ($5,000)