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Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October $31,$ Marshall Inc. estimated the following operating results:

Sales $(29,600$ x $$103)$ $$3,048,800$

Manufacturing costs $(29,600$ units$)$:

Direct materials $1,844,080$

Direct labor $438,080$

Variable factory overhead $204,240$

Fixed factory overhead $242,720$

Fixed selling and administrative expenses $66,000$

Variable selling and administrative expenses $79,900$

The company is evaluating a proposal to manufacture $32,800$ units instead of $29,600$ units, thus creating an ending inventory of $3,200$ 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 $29,600$ and $32,800$ units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.

Absorption Costing Income Statement

For the Month Ending October $31$

$29,600$ Units Manufactured $32,800$ Units Manufactured

Sales

$Sales

$3,048,800$

$Sales

$3,355,200$

Cost of goods sold:

Cost of goods manufactured

$Cost of goods manufactured

$2,529,400$

$Cost of goods manufactured

$2,792,960$

Inventory, October $31$

Inventory, October $31$

Inventory, October $31$

Total cost of goods sold

$Total cost of goods sold

$Total cost of goods sold

Gross profit

$Gross profit

$Gross profit

Selling and administrative expenses

Selling and administrative expenses

Selling and administrative expenses

Operating 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 $32,800$ 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 $32,800$ unit level. Sales $-($cost of goods manufactured $-$ Inventory, October $31)=$ Gross profit; gross profit $-$ selling and administrative expenses $=$ income from operations. Remember that the Inventory, October $31$ adjustment will only be necessary at the $32,800$ level.

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a$.2.$ Prepare an estimated income statement, comparing operating results if $29,600$ and $32,800$ units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.

Variable Costing Income Statement

For the Month Ending October $31$

$29,600$ Units Manufactured $32,800$ Units Manufactured

Sales

$Sales

$Sales

Variable cost of goods sold:

Variable cost of goods manufactured

$Variable cost of goods manufactured

$Variable cost of goods manufactured

Inventory, October $31$

Inventory, October $31$

Inventory, October $31$

Total variable cost of goods sold

$Total variable cost of goods sold

$Total variable cost of goods sold

Manufacturing margin

$Manufacturing margin

$Manufacturing margin

Variable selling and administrative expenses

Variable selling and administrative expenses

Variable selling and administrative expenses

Contribution margin

$Contribution margin

$Contribution margin

Fixed costs:

Fixed factory overhead

$Fixed factory overhead

$Fixed factory overhead

Fixed selling and administrative expenses

Fixed selling and administrative expenses

Fixed selling and administrative expenses

Total fixed costs $fill in the blank $4$e$64$d$6$ff$7063$ff$6\_28$

$fill in the blank $4$e$64$d$6$ff$7063$ff$6\_29$

Operating income

$Operating income

$Operating income