Prior to the first month of operations ending July 31, 2014, Muzenski Industries Inc. estimated the following operating results:

Sales (28,800 x 575)………………………………………………………………….52,160,000

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.

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in the absorption costing format.

Muzenski Industries Inc.

Absorption Costing Income Statement

For the Month Ending July 31, 2014

Recall that under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. To obtain direct materials for this exercise, calculate unit cost for direct materials as $1,324,800 ÷ 28,800 units. Calculate unit cost for direct labor as $316,800 ÷ 28,800 units. Calculate unit cost for variable factory overhead as $144,000 ÷ 28,800 units. Calculate unit cost for fixed factory overhead as $216,000 ÷ 28,800 units. Add together to get total unit cost for under 28,800 units manufactured. For 36,000 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead as $216,000 ÷ 36,000 units and add this to obtain the unit cost at the 36,000 unit level. Sales - (cost of goods manufactured - ending inventory) = Gross profit; gross profit - selling and administrative expenses = income from operations. Remember that the ending inventory adjustment will only be necessary at the 36,000 level.

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in the variable costing format.

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