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

Sales (40,000 units) $ 4,000,000

Manufacturing costs (40,000 units)

Direct materials 1,440,000

Direct labor 480,000

Variable factory overhead 240,000

Fixed factory overhead 120,000

Fixed selling and administrative expenses 75,000

Variable selling and administrative expenses 200,000

The company is evaluating a proposal to manufacture 50,000 units instead of 40,000 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.

1. Prepare an estimated incomes statement, comparing operating results if 40,000 and 50,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format.
2. Clearly explain the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement.