Veekay Company was organized on November 1 of the previous y

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:

     After seeing the $37,300 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:

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

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

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 recommend whether the company should continue operations.

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

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

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:

Solution

Answer 1 Answer 2 VEEKAY COMPANY VEEKAY COMPANY Schedule of Cost of Goods Manufactured for June Income Statement for the June Direct Materials Sales $795,000 Raw Materials ,June 1 $20,800 Cost of goods sold Add : Raw Materials Purchases $263,000 Finished Goods , June 1 $24,160 Raw Materials available for use $283,800 Add : Cost of goods manufactured $595,940 Less : Raw Materials ,June 30 $54,100 Less : Finished Goods ,June 30 $76,260 $543,840 Direct Materials Used $229,700 Gross Margin $251,160 Direct Labour $111,600 Less : Operating Expenses Factory Overheads Insurance $1,180 Depreciation Expense-Factory Equipment $16,600 Utilities $13,880 Factory insurance $10,620 Rent Expense $8,700 Factory Utilities $55,520 Selling and administrative salaries $46,200 Indirect Labour $133,400 Depreciation, sales equipment $13,700 Rent Expense - Factory facilities $49,300 Advertising $98,800 Maintenance expense - Factory equipment $9,800 Total Operating Expenses $182,460 Total Factory Overhead costs $275,240 Operating Income $68,700 Total Manufacturing Costs $616,540 Add : Work in process , June 1 $79,700 Total Cost of work in process $696,240 Less : Work in process , June 30 $100,300 Cost of goods Manufactured $595,940 Considering the answer in step 2 , it is recommended that the company should continue operations.