Nash Company was organized on April 1, 2011 of the current year. After six months of startup losses, management had expected to show a profit during October. Management was disappointed however, when the income statement for October showed a loss. October’s income statement follows:
Nash Company
Income Statement
For the month ended October 31, 2011
|
Sales |
565,000 |
|
|
Less: Operating Expenses |
||
|
Direct Labor Costs |
103,000 |
|
|
Raw Materials Purchased |
196,000 |
|
|
Manufacturing Overhead |
113,000 |
|
|
Selling and Administrative Expenses |
222,000 |
634,000 |
|
Net Operating Loss |
(69,000) |
|
After seeing the $69,000 loss for October, Nash’s president stated the following, “I expected to be profitable within the six month time frame and this loss for October is even worse than September’s. I am beginning to feel we should consider selling the company assets and if we do not sell the assets, we may not find a buyer. By the way, I do not believe we should look for a new controller. We will proceed with Barry for the time being.”
The company controller resigned back in September. Barry, is the new assistant in controller’s office was hired back in August, prepared the income statement above. Barry is very inexperienced when it comes to manufacturing operations.
Inventory balances at the beginning and end of September were:
|
Raw Materials, October 1, 2011 |
16,000 |
|
Raw Materials, October 31, 2011 |
19,000 |
|
Work In Process, October 1, 2011 |
22,000 |
|
Work in Process, October 31, 2011 |
25,000 |
|
Finished Goods, October 1, 2011 |
45,000 |
|
Finished Goods, October 31, 2011 |
59,000 |
The president has asked you to check over the income statement and make a recommendation as to whether the company should look for a buyer for its assets.
Requirements:
1. While gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for October.
2. As a second step, prepare a new income statement for October.
3. Based on your statements prepared in (1) and (2) above, would you recommend that the company look for a buyer?