Skyler Company Income Statement

Skyler 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:

Skyler Company
Income Statement
For the month ended June 30, XXXX

Sales $600,000
Less operating expenses:
Selling and administrative salaries $35,000
Rent on facilities 40,000
Purchases of raw materials 190,000
Insurance 8,000
Depreciation, sales equipment 10,000
Utilities costs 50,000
Indirect labor 108,000
Direct labor 90,000
Depreciation, factory equipment 12,000
Maintenance, factory 7,000
Advertising 80,000 630,000
Net Operating Loss $(30,000)

After seeing the $30,000 loss for June, Skyler'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 is time for us to throw in the towel and accept one of those offers we have had for the company. To make matters worse, I just heard that Linda won't be back from her surgery for at least six more weeks."

Linda 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 80% 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 the month were as follows:

June 1 June 30
Raw materials $17,000 $42,000
Work in process 70,000 85,000
Finished goods 20,000 60,000

c. Some 75% of the insurance and 90% 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.

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.

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