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 (16,800 x $58)	$974,400
Manufacturing costs (16,800 units):
Direct materials	588,000
Direct labor	139,440
Variable factory overhead	65,520
Fixed factory overhead	77,280
Fixed selling and administrative expenses	21,000
Variable selling and administrative expenses	25,400

The company is evaluating a proposal to manufacture 18,400 unitsinstead of 16,800 units, thus creating an ending inventory of 1,600units. Manufacturing the additional units will not change sales,unit variable factory overhead costs, total fixed factory overheadcost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement,comparing operating results if 16,800 and 18,400 units aremanufactured in the absorption costing format. If an amount boxdoes not require an entry leave it blank.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	16,800 Units Manufactured	18,400 Units Manufactured
	$	$
	$	$
	$	$
	$	$
	$	$

a. 2. Prepare an estimated income statement,comparing operating results if 16,800 and 18,400 units aremanufactured in the variable costing format. If an amount box doesnot require an entry leave it blank.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	16,800 Units Manufactured	18,400 Units Manufactured
	$	$
Variable cost of goods sold:
Variable cost of goods manufactured	$	$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

b. What is the reason for the difference inoperating income reported for the two levels of production by theabsorption costing income statement?

The increase in income from operations under absorption costingis caused by the allocation of fixed factory  overheadcost over a fewer  number of units. Thus, the cost ofgoods sold is less . The difference can also be explained by theamount of fixed factory  overhead cost included in thebeginning  inventory.