Prior to the first month of operations ending April 30, Lilly Corp estimated the following operating results:

Sales (50,000 units)$ 5,000,000

Manufacturing costs (50,000 units)

Direct materials 1,800,000

Direct labor 600,000

Variable factory overhead 300,000

Fixed factory overhead 150,000

Fixed selling and administrative expenses 100,000

Variable selling and administrative expenses 250,000

The company is evaluating a proposal to manufacture 60,000 units instead of 50,000 units, thus creating an ending inventory of 10,000 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.

a. Prepare an estimated incomes statement, comparing operating results if 50,000 and 60,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format.

b. Compute the Balance Sheet amounts for Ending Finished Goods (assuming 60,000 units are produced) under (1) absorption costing and (2) variable costing.

c. Clearly explain the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement.