The core claim of the question is to prepare an Income Statement with a focus on the behavior of costs concerning the level of sales activity, considering fixed and variable costs. 1. Calculate the variable portion of Selling Expenses: 10% of Sales = 0.10 * 780,000 = 78,000 (variable portion) Fixed portion of Selling Expenses = 120,000 - 78,000 = $42,000 2. Prepare the Income Statement with the behavior of costs: Sales:$780,000 Variable Cost of Sales: $520,000 Gross Profit:$260,000 Variable Selling Expenses: $78,000 Fixed Selling Expenses:$42,000 Fixed Administrative Expenses: $200,000 Operating Income:$260,000 - 78,000 - 42,000 - 200,000 = -60,000