The demand for cocoa butter hand lotion, one of numerous products manufactured by Smooth Skin Care Products Inc., has dropped sharply because of recent competition from a similar product. The controller

has been asked by the president of the company for advice on whether to continue production during the following month or to suspend the manufacture of cocoa butter hand lotion until a strategy to regain market share. The controller has assembled the following pertinent data: Smooth Skin Care Products Inc. Income Statement - Cocoa Butter Hand Lotion For the Month Ended January 31 Financial Categories Dollar Amount Sales (400,000) $ 32,200,000 Cost of goods sold $ 28,330,000 Gross profit $ 3,870,000 Selling and admin expenses $ 4,270,000 Loss from operations $ (400,000) The production costs and selling and administrative expenses, based on the production of 400,000 units in the Income Statement above, are as follows: Category Direct materials Direct labor Dollar Amount $16 per unit 17 per unit Variable manufacturing costs Variable selling and admin. Expenses Fixed manufacturing cost Fixed selling and admin. Expenses 35 per unit 10 per unit $1,500,000 for January 270,000 for January Sales for February are expected to drop about 20% below those of the preceding month. No significant changes are anticipated in the fixed costs or variable costs per unit. No extra costs will be incurred in discontinuing operations in the portion of/nthe plant associated with cocoa butter hand lotion. The inventory of cocoa butter hand lotion at the beginning and end of February is expected to be inconsequential. Instructions a. Prepare an estimated income statement in absorption costing form for February for Cocoa butter hand lotion, assuming production continues during the month. b. Prepare an estimated income statement in variable costing form for February for cocoa butter hand lotion, assuming production continues during the month. Sales Variable Cost of Goods Sold 27,200,000 Manufacturing Margin 5,000,000 Variable selling & Admin expenses 4,000,000 Contribution margin 32,200,000 1,000,000 Fixed costs Fixed manufacturing costs 1,500,000 Fixed selling and admin expenses 270,000 Total fixed costs 1,770,000 Income from operations ($770,000)