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 (28,800 x $101)	$2,908,800
Manufacturing costs (28,800 units):
Direct materials	1,751,040
Direct labor	414,720
Variable factory overhead	192,960
Fixed factory overhead	230,400
Fixed selling and administrative expenses	62,700
Variable selling and administrative expenses	75,800

The company is evaluating a proposal to manufacture 32,000 units instead of 28,800 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.

Question Content Area

a. 1. Prepare an estimated income statement, comparing operating results if 28,800 and 32,000 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

	28,800 Units Manufactured	32,000 Units Manufactured
Contribution marginFixed manufacturing costsInventory, October 31SalesSelling and administrative expenses	$- Select -	$- Select -
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, October 31Sales	$- Select -	$- Select -
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, October 31Selling and administrative expenses	- Select -	- Select -
SalesSelling and administrative expensesTotal cost of goods manufacturedTotal cost of goods soldTotal fixed manufacturing costs	$- Select -	$- Select -
Fixed manufacturing costsFixed selling and administrative expensesGross profitInventory, October 31Sales	$- Select -	$- Select -
Contribution marginCost of goods soldInventory, October 31SalesSelling and administrative expenses	- Select -	- Select -
Operating incomeOperating loss	$- Select -	$- Select -

Question Content Area

a. 2. Prepare an estimated income statement, comparing operating results if 28,800 and 32,000 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement? The increase in income from operations under absorption costing is caused by the allocation of overhead cost over a number of units. Thus, the cost of goods sold is . The difference can also be explained by the amount of overhead cost included in the inventory