Prior to the first month of operations ending July 31, 2016, Muzenski Industries Inc. estimated the following operating results:
Sales (28,800 × $75) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,160,000
Manufacturing costs (28,800 units):
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,324,800
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .316,800
Variable factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 144,000
Fixed factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,000
Fixed selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,400
Variable selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,500
The company is evaluating a proposal to manufacture 36,000 units instead of 28,800 units, thus creating an ending inventory of 7,200 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.
a. Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in
(1) The absorption costing format and
(2) The variable costing format.
b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?