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Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending January 31, Lemke Inc. estimated the following operating results:

Line Item Description	Amount
Sales (16,800 $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 units instead of 16,800 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 16,800 and 18,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Line Item Description	16,800 Units Manufactured	18,400 Units Manufactured
Contribution marginFixed manufacturing costsInventory, January 31SalesSelling and administrative expenses	$- Select -	$- Select -
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, January 31Sales	$- Select -	$- Select -
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, January 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, January 31Sales	$- Select -	$- Select -
Contribution marginCost of goods soldInventory, January 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 16,800 and 18,400 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Line Item Description	16,800 Units Manufactured	18,400 Units Manufactured
Contribution marginFixed factory overheadSalesVariable cost of goods manufacturedVariable cost of goods sold	$- Select -	$- Select -
Variable cost of goods sold:
InventorySalesVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expenses	$- Select -	$- Select -
Contribution marginFixed factory overheadInventory, January 31Manufacturing marginSales	- Select -	- Select -
Contribution marginInventoryTotal variable cost of goods manufacturedTotal variable cost of goods soldTotal variable selling and administrative expenses	$- Select -	$- Select -
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$- Select -	$- Select -
Contribution marginFixed factory overheadManufacturing marginVariable cost of goods soldVariable selling and administrative expenses	- Select -	- Select -
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$- Select -	$- Select -
Fixed costs:
Fixed factory overheadFixed inventoryFixed manufacturing marginFixed salesVariable selling and administrative expenses	$- Select -	$- Select -
Fixed contribution marginFixed inventoryFixed selling and administrative expensesVariable cost of goods soldVariable selling and administrative expenses	- Select -	- Select -
Total fixed costs	$Total fixed costs	$Total fixed costs
Operating incomeOperating loss	$- Select -	$- Select -

Question Content Area

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 factoryvariable

overhead cost over a fill in the blank 2 of 5

fewerlarger

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

lessmore

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

fixed factoryvariable

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

beginningending

inventory.