Question

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

1	Sales (28,800 × $90)	$2,592,000.00
2	Manufacturing costs (28,800 units):
3	Direct materials	1,209,600.00
4	Direct labor	288,000.00
5	Variable factory overhead	115,200.00
6	Fixed factory overhead	221,760.00
7	Fixed selling and administrative expenses	29,400.00
8	Variable selling and administrative expenses	35,400.00

The company is evaluating a proposal to manufacture 36,000 units instead of 28,800 units, thus creating an ending inventory of 7,200 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.

Required:

a.

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Round your unit cost to two decimal places and final answers to the nearest dollar amount. Enter all amounts as positive numbers.

b.

What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?

Answer 1

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Part a Absorption Costing
	28,800Units	36,000Units
	Manufactured	Manufactured
Sales	$             2,592,000	$             2,592,000
Cost of goods sold:
Cost of goods manufactured:
28,800 units × $63.70*	$             1,834,560
36,000 units × $62.16**		$             2,237,760
Less inventory, July31 (7,200 units × $62.16)		$                 447,552
Cost of goods sold	$             1,834,560	$             1,790,208
Gross profit	$                 757,440	$                 801,792
Selling and administrative expenses	$                   64,800	$                   64,800
Income from operations	$                 692,640	$                 736,992
*Unit cost of goods manufactured:
Direct materials ($1,209,6800 ÷ 28,800)	$                     42.00
Direct labor ($288,000 ÷ 28,800)	$                     10.00
Variable factory over head cost ($115,2000 ÷ 28,800)	$                        4.00
Fixed factory over head cost ($221,760 ÷ 28,800)	$                        7.70
Total unit cost	$                     63.70
**Unit cost of goods manufactured:
Direct materials ($1,209,6800 ÷ 28,800)	$                     42.00
Direct labor ($288,000 ÷ 28,800)	$                     10.00
Variable factory over head cost ($115,2000 ÷ 28,800)	$                        4.00
Fixed factory over head cost ($221,760÷36,000)	$                        6.16
Total unit cost	$                     62.16
Variable Costing:
	28,800 Units	36,000 Units
	Manufactured	Manufactured
Sales	$             2,592,000	$             2,592,000
Variable cost of goods sold:
Variable cost of goods manufactured:
28,800 units × $56.00*	$             1,612,800
36,000 units × $56.00*		$             2,016,000
Less inventory, July 31(7,200 units × $56.00)		$                 403,200
Variable cost of goods sold	$             1,612,800	$             1,612,800
Manufacturing margin	$                 979,200	$                 979,200
Variable selling and administrative expenses	$                   35,400	$                   35,400
Contribution margin	$                 943,800	$                 943,800
Fixed costs:
Fixed factory over head	$                 221,760	$                 221,760
Fixed selling and administrative expenses	$                   29,400	$                   29,400
Total fixed costs	$                 251,160	$                 251,160
Income from operations	$                 692,640	$                 692,640
Variable Cost of goods manufactured:
Direct materials ($1,209,6800 ÷ 28,800)		$                     42.00
Direct labor ($288,000 ÷ 28,800)		$                     10.00
Variable factory over head cost ($115,2000 ÷ 28,800)		$                        4.00
Total unit variable cost		$                     56.00
Part b
If 36,000 units are prodcued, there will be increase in income by $ 44,352 under absorption costing method.
This is caused by allocation of Fixed Manufacturing cost of $221,760 over larger no of units i.e. 36,000 units.
In other words, this is the amount of fixed overhead cost included in ending inventory (7,200 units*$6.16 per unit)