Estimated Income Statements, using Absorption and VariableCosting Prior to the first month of operations ending October 31,Marshall Inc. estimated the following operating results: Sales(27,200 x $96) $2,611,200 Manufacturing costs (27,200 units):Direct materials 1,572,160 Direct labor 372,640 Variable factoryoverhead 174,080 Fixed factory overhead 206,720 Fixed selling andadministrative expenses 56,200 Variable selling and administrativeexpenses 68,000 The company is evaluating a proposal to manufacture30,400 units instead of 27,200 units, thus creating an endinginventory of 3,200 units. Manufacturing the additional units willnot change sales, unit variable factory overhead costs, total fixedfactory overhead cost, or total selling and administrativeexpenses. a. 1. Prepare an estimated income statement, comparingoperating results if 27,200 and 30,400 units are manufactured inthe absorption costing format. If an amount box does not require anentry leave it blank. Marshall Inc. Absorption Costing IncomeStatement For the Month Ending October 31 27,200 Units Manufactured30,400 Units Manufactured Sales $ 2,611,200 $ 2,611,200 Cost ofgoods sold: Cost of goods manufactured $ 2,325,600 $ 2,449,800Inventory, October 31 0 Total cost of goods sold $ 2,325,600 $Gross profit $ 285,600 $ Selling and administrative expenses124,200 124,200 Operating income $ 161,400 $ Feedback a. 1. Recallthat under absorption costing, the cost of goods manufacturedincludes direct materials, direct labor, and factory overheadcosts. Both fixed and variable factory costs are included as partof factory overhead. Calculate unit cost for direct materials,direct labor, variable factory overhead, fixed factory overhead.Add together to get total unit cost. For 30,400 units, use the sameunit costs for direct materials, direct labor, and variableoverhead, but instead recalculate the fixed factory overhead andadd this to obtain the unit cost at the 30,400 unit level. Sales -(cost of goods manufactured - Inventory, October 31) = Grossprofit; gross profit - selling and administrative expenses = incomefrom operations. Remember that the Inventory, October 31 adjustmentwill only be necessary at the 30,400 level. a. 2. Prepare anestimated income statement, comparing operating results if 27,200and 30,400 units are manufactured in the variable costing format.If an amount box does not require an entry leave it blank. MarshallInc. Variable Costing Income Statement For the Month Ending October31 27,200 Units Manufactured 30,400 Units Manufactured Sales $2,611,200 $ 2,611,200 Variable cost of goods sold: Variable cost ofgoods manufactured $ 2,118,880 $ Inventory, October 31 0 Totalvariable cost of goods sold $ 2,118,880 $ Manufacturing margin $1,572,600 $ Variable selling and administrative expensesContribution margin $ $ Fixed costs: Fixed factory overhead $ $Fixed selling and administrative expenses Total fixed costs $ $Operating income $ $ Feedback a. 2. Recall that under variablecosting, fixed factory overhead costs are not a part of the cost ofgoods manufactured. Instead, fixed factory overhead costs aretreated as a period expense. Therefore, recast the income statementsuch that Net sales - variable cost of products sold =Manufacturing margin; Manufacturing margin - variable selling andadministrative expenses = Contribution margin; Contribution margin- (fixed manufacturing costs + fixed selling and administrativeexpenses) = income from operations. Remember that the variable costof manufacturing will be the same at both levels after adjustingfor Inventory, October 31. Thus manufacturing margin should also bethe same for both levels. b. What is the reason for the differencein operating income reported for the two levels of production bythe absorption costing income statement? The increase in incomefrom operations under absorption costing is caused by theallocation of fixed factory overhead cost over a larger number ofunits. Thus, the cost of goods sold is less . The difference canalso be explained by the amount of fixed factory overhead costincluded in the ending inventory.