James Company_Cost of goods manufactured

James 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:

James Company

Income Statement

For the Month Ended June 30

Sales $600,000

Less operating expenses:

Selling and administrative services  $35,000

Rent on facilities   40,000

Purchases of raw materials 190,000

Insurance  8,000

Depreciation, sales equipment   10,000

Utilities cost  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, James’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 and accept one of those offers we've 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) 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.

Required:

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

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

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