Absorption Statement

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31
Sales		$1,125,000
Cost of goods sold:
Cost of goods manufactured	$840,000
Ending inventory	(210,000)
Total cost of goods sold		(630,000)
Gross profit		$495,000
Selling and administrative expenses		(275,000)
Operating income		$220,000

Variable Statement

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31
Sales		$1,125,000
Variable cost of goods sold:
Variable cost of goods manufactured	$600,000
Ending inventory	(150,000)
Total variable cost of goods sold		(450,000)
Manufacturing margin		$675,000
Variable selling and administrative expenses		(210,000)
Contribution margin		$465,000
Fixed costs:
Fixed manufacturing costs	$240,000
Fixed selling and administrative expenses	65,000
Total fixed costs		(305,000)
Operating income		$160,000

1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Operating Income
Original Production Level-Absorption	Original Production Level-Variable	Additional 10,000 Units-Absorption	Additional 10,000 Units-Variable
$	$	$	$