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 (19,200 $68)	$1,305,600
Manufacturing costs (19,200 units):
Direct materials	787,200
Direct labor	186,240
Variable factory overhead	86,400
Fixed factory overhead	103,680
Fixed selling and administrative expenses	28,200
Variable selling and administrative expenses	34,100

The company is evaluating a proposal to manufacture 21,600 units instead of 19,200 units, thus creating an ending inventory of 2,400 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.

Question Content Area

a. 1. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Line Item Description	19,200 Units Manufactured	21,600 Units Manufactured
Contribution margin Fixed manufacturing costs Inventory, January 31SalesSelling and administrative expenses	$- Select -	$- Select -
Cost of goods sold:
Cost of goods manufactured Cost of goods sold Fixed manufacturing costs Inventory, January 31Sales	$- Select -	$- Select -
Contribution margin Cost of goods manufactured Fixed manufacturing costs Inventory, January 31Selling and administrative expenses	- Select -	- Select -
Sales Selling and administrative expenses Total cost of goods manufactured Total cost of goods sold Total fixed manufacturing costs	$- Select -	$- Select -
Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Inventory, January 31Sales	$- Select -	$- Select -
Contribution margin Cost of goods sold Inventory, January 31SalesSelling and administrative expenses	- Select -	- Select -
Operating income Operating loss	$- Select -	$- Select -

Question Content Area

a. 2. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Line Item Description	19,200 Units Manufactured	21,600 Units Manufactured
Contribution margin Fixed factory overhead Sales Variable cost of goods manufactured Variable cost of goods sold	$- Select -	$- Select -
Variable cost of goods sold:
Inventory Sales Variable cost of goods manufactured Variable cost of goods sold Variable selling and administrative expenses	$- Select -	$- Select -
Contribution margin Fixed factory overhead Inventory, January 31Manufacturing margin Sales	- Select -	- Select -
Contribution margin Inventory Total variable cost of goods manufactured Total variable cost of goods sold Total variable selling and administrative expenses	$- Select -	$- Select -
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufactured	$- Select -	$- Select -
Contribution margin Fixed factory overhead Manufacturing margin Variable cost of goods sold Variable selling and administrative expenses	- Select -	- Select -
Contribution margin Fixed factory overhead Manufacturing margin Sales Variable cost of goods manufactured	$- Select -	$- Select -
Fixed costs:
Fixed factory overhead Fixed inventoryFixed manufacturing margin Fixed sales Variable selling and administrative expenses	$- Select -	$- Select -
Fixed contribution margin Fixed inventory Fixed selling and administrative expenses Variable cost of goods sold Variable selling and administrative expenses	- Select -	- Select -
Total fixed costs	$Total fixed costs	$Total fixed costs
Operating income Operating 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 factory variable

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

less more

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

fixed factory variable

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

beginning ending

inventory.