Estimated Income Statements, using Absorption and Variable Costing

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

Line Item Description	Amount
Sales (20,800 $73)	$1,518,400
Manufacturing costs (20,800 units):
Direct materials	917,280
Direct labor	216,320
Variable factory overhead	101,920
Fixed factory overhead	120,640
Fixed selling and administrative expenses	32,800
Variable selling and administrative expenses	39,700

The company is evaluating a proposal to manufacture 23,200 units instead of 20,800 units, thus creating an ending inventory of 2,400 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.

Question Content Area

a. 1. Prepare an estimated income statement, comparing operating results if 20,800 and 23,200 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Line Item Description	20,800 Units Manufactured	23,200 Units Manufactured
Contribution marginFixed manufacturing costsInventory, January 31SalesSelling and administrative expenses	$	$
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, January 31Sales	$	$
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, January 31Selling and administrative expenses
SalesSelling and administrative expensesTotal cost of goods manufacturedTotal cost of goods soldTotal fixed manufacturing costs	$	$
Fixed manufacturing costsFixed selling and administrative expensesGross profitInventory, January 31Sales	$	$
Contribution marginCost of goods soldInventory, January 31SalesSelling and administrative expenses
Operating incomeOperating loss	$	$

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 23,200 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 23,200 unit level. Sales - (Cost of goods manufactured - Inventory, January 31) = Gross profit; Gross profit - Selling and administrative expenses = Income from operations. Remember that the Inventory, January 31 adjustment will only be necessary at the 23,200 level.

a. 2. Prepare an estimated income statement, comparing operating results if 20,800 and 23,200 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Line Item Description	20,800 Units Manufactured	23,200 Units Manufactured
Contribution marginFixed factory overheadSalesVariable cost of goods manufacturedVariable cost of goods sold	$	$
Variable cost of goods sold:
InventorySalesVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expenses	$	$
Contribution marginFixed factory overheadInventory, January 31Manufacturing marginSales
Contribution marginInventoryTotal variable cost of goods manufacturedTotal variable cost of goods soldTotal variable selling and administrative expenses	$	$
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$	$
Contribution marginFixed factory overheadManufacturing marginVariable cost of goods soldVariable selling and administrative expenses
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$	$
Fixed costs:
Fixed factory overheadFixed inventoryFixed manufacturing marginFixed salesVariable selling and administrative expenses	$	$
Fixed contribution marginFixed inventoryFixed selling and administrative expensesVariable cost of goods soldVariable selling and administrative expenses
Total fixed costs	$	$
Operating incomeOperating loss	$	$