Direct materials	437,760
Direct labor	103,680
Variable factory overhead	48,960
Fixed factory overhead	57,600
Fixed selling and administrative expenses	15,700
Variable selling and administrative expenses	19,000

The company is evaluating a proposal to manufacture 16,000 units instead of 14,400 units, thus creating an ending inventory of 1,600 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.

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a. 1. Prepare an estimated income statement, comparing operating results if 14,400 and 16,000 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Line Item Description	14,400 Units Manufactured	16,000 Units Manufactured
Contribution marginFixed manufacturing costsInventory, January 31SalesSelling and administrative expensesSales	$Sales	$Sales
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, January 31SalesCost of goods manufactured	$Cost of goods manufactured	$Cost of goods manufactured
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, January 31Selling and administrative expensesInventory, January 31	Inventory, January 31	Inventory, January 31
SalesSelling and administrative expensesTotal cost of goods manufacturedTotal cost of goods soldTotal fixed manufacturing costsTotal cost of goods sold	$Total cost of goods sold	$Total cost of goods sold
Fixed manufacturing costsFixed selling and administrative expensesGross profitInventory, January 31SalesGross profit	$Gross profit	$Gross profit
Contribution marginCost of goods soldInventory, January 31SalesSelling and administrative expensesSelling and administrative expenses	Selling and administrative expenses	Selling and administrative expenses
Operating incomeOperating lossOperating income	$Operating income	$Operating income

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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 16,000 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 16,000 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 16,000 level.

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a. 2. Prepare an estimated income statement, comparing operating results if 14,400 and 16,000 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Line Item Description	14,400 Units Manufactured	16,000 Units Manufactured
Contribution marginFixed factory overheadSalesVariable cost of goods manufacturedVariable cost of goods soldSales	$Sales	$Sales
Variable cost of goods sold:
InventorySalesVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expensesVariable cost of goods manufactured	$Variable cost of goods manufactured	$Variable cost of goods manufactured
Contribution marginFixed factory overheadInventory, January 31Manufacturing marginSalesInventory, January 31	Inventory, January 31	Inventory, January 31
Contribution marginInventoryTotal variable cost of goods manufacturedTotal variable cost of goods soldTotal variable selling and administrative expensesTotal variable cost of goods sold	$Total variable cost of goods sold	$Total variable cost of goods sold
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufacturedManufacturing margin	$Manufacturing margin	$Manufacturing margin
Contribution marginFixed factory overheadManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufacturedContribution margin	$Contribution margin	$Contribution margin
Fixed costs:
Fixed factory overheadFixed inventoryFixed manufacturing marginFixed salesVariable selling and administrative expensesFixed factory overhead	$Fixed factory overhead	$Fixed factory overhead
Fixed contribution marginFixed inventoryFixed selling and administrative expensesVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses
Total fixed costs	$Total fixed costs	$Total fixed costs
Operating incomeOperating lossOperating income	$Operating income	$Operating income

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a. 2. Recall that under variable costing, fixed factory overhead costs are not a part of the cost of goods manufactured. Instead, fixed factory overhead costs are treated as a period expense. Therefore, recast the income statement such that Net sales - Variable cost of products sold = Manufacturing margin; Manufacturing margin - Variable selling and administrative expenses = Contribution margin; Contribution margin - (Fixed manufacturing costs + Fixed selling and administrative expenses) = Income from operations. Remember that the variable cost of manufacturing will be the same at both levels after adjusting for Inventory, January 31. Thus manufacturing margin should also be the same for both levels.

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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 operating income under absorption costing is caused by the allocation of fill in the blank 1 of 5

fixed factoryvariablefixed factory

overhead cost over a fill in the blank 2 of 5

fewerlargerlarger

number of units. Thus, the cost of goods sold is fill in the blank 3 of 5

lessmoreless

. The difference can also be explained by the amount of fill in the blank 4 of 5

fixed factoryvariablefixed factory

overhead cost included in the fill in the blank 5 of 5

beginningendingending

inventory.