Third Street Manufacturing Company has no beginning inventory, and sales are estimated to be 30,000 units at $100 per unit. Third Street’s management is evaluating whether to manufacture 30,000 units (Proposal 1) or 40,000 units (Proposal 2). Sales will not change if more than 30,000 units are manufactured. The costs and expenses for each proposal follow:

a. Prepare an estimated income statement, comparing operating results if 30,000 and 40,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format.

b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement?

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Manufacturing costs: Variable. Fixed. Total...... Selling and administrative expenses: Variable. Fixed..... Total. Proposal 1: 30,000 Units Manufactured Number Unit Total Cost of Units Cost $1,200,000 600,000 $1,800,000 $ 210,000 140,000 $ 350,000 30,000 $40 30,000 20 30,000 7 Proposal 2: 40,000 Units Manufactured Number Unit of Units Total Cost Cost $1,600,000 600,000 $2,200,000 $ 210,000 140,000 $ 350,000 40,000 $40 40,000 15 30,000 7