Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results:

Sales (24,800 x $88)	$2,182,400
Manufacturing costs (24,800 units):
Direct materials	1,319,360
Direct labor	312,480
Variable factory overhead	146,320
Fixed factory overhead	173,600
Fixed selling and administrative expenses	47,200
Variable selling and administrative expenses	57,100

The company is evaluating a proposal to manufacture 28,000 units instead of 24,800 units, thus creating an ending inventory of 3,200 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.

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a. 1. Prepare an estimated income statement, comparing operating results if 24,800 and 28,000 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31

	24,800 Units Manufactured	28,000 Units Manufactured
Contribution marginFixed manufacturing costsInventory, October 31SalesSelling and administrative expensesSales	$Sales	$Sales
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, October 31SalesCost of goods manufactured	$Cost of goods manufactured	$Cost of goods manufactured
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, October 31Selling and administrative expensesInventory, October 31	Inventory, October 31	Inventory, October 31
SalesSelling and administrative expensesTotal cost of goods manufacturedTotal cost of goods soldTotal fixed manufacturing costsTotal cost of goods sold	$Total cost of goods sold	$Total cost of goods sold
Fixed manufacturing costsFixed selling and administrative expensesGross profitInventory, October 31SalesGross profit	$Gross profit	$Gross profit
Contribution marginCost of goods soldInventory, October 31SalesSelling and administrative expensesSelling and administrative expenses	Selling and administrative expenses	Selling and administrative expenses
Operating incomeOperating lossOperating income	$Operating income	$Operating income

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a. 1. 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. Calculate unit cost for direct materials, direct labor, variable factory overhead, fixed factory overhead. Add together to get total unit cost. For 28,000 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead and add this to obtain the unit cost at the 28,000 unit level. Sales - (cost of goods manufactured - Inventory, October 31) = Gross profit; gross profit - selling and administrative expenses = income from operations. Remember that the Inventory, October 31 adjustment will only be necessary at the 28,000 level.

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a. 2. Prepare an estimated income statement, comparing operating results if 24,800 and 28,000 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Marshall Inc. Variable Costing Income Statement For the Month Ending October 31

	24,800 Units Manufactured	28,000 Units Manufactured
Contribution marginFixed factory overheadSalesVariable cost of goods manufacturedVariable cost of goods soldSales	$Sales	$Sales
Variable cost of goods sold:
InventorySalesVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expensesVariable cost of goods manufactured	$Variable cost of goods manufactured	$Variable cost of goods manufactured
Contribution marginFixed factory overheadInventory, October 31Manufacturing marginSalesInventory, October 31	Inventory, October 31	Inventory, October 31
Contribution marginInventoryTotal variable cost of goods manufacturedTotal variable cost of goods soldTotal variable selling and administrative expensesTotal variable cost of goods sold	$Total variable cost of goods sold	$Total variable cost of goods sold
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufacturedManufacturing margin	$Manufacturing margin	$Manufacturing margin
Contribution marginFixed factory overheadManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufacturedContribution margin	$Contribution margin	$Contribution margin
Fixed costs:
Fixed factory overheadFixed inventoryFixed manufacturing marginFixed salesVariable selling and administrative expensesFixed factory overhead	$Fixed factory overhead	$Fixed factory overhead
Fixed contribution marginFixed selling and administrative expensesFixed inventoryVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses
Total fixed costs	$fill in the blank	$fill in the blank
Operating incomeOperating lossOperating income	$Operating income	$