Question

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

1	Sales (28,800 × $80)	$2,304,000.00
2	Manufacturing costs (28,800 units):
3	Direct materials	1,267,200.00
4	Direct labor	316,800.00
5	Variable factory overhead	172,800.00
6	Fixed factory overhead	221,760.00
7	Fixed selling and administrative expenses	28,800.00
8	Variable selling and administrative expenses	35,800.00

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?

Please use correct labels and descriptions!

Labels
Fixed costs
For the Month Ending October 31
October 31
Amount Descriptions
Contribution margin
Contribution margin ratio
Cost of goods manufactured
Cost of goods sold
Fixed factory overhead
Fixed selling and administrative expenses
Gross profit
Income from operations
Inventory, October 31
Loss from operations
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Selling and administrative expenses
Total cost of goods sold
Total fixed costs
Total variable cost of goods sold
Variable cost of goods manufactured
Variable cost of goods sold
Variable selling and administrative expenses

a(1). Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in the absorption 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.

Marshall Inc.

Absorption Costing Income Statement

1		28,800 Units Manufactured	36,000 Units Manufactured
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9

a(2). Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in 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. Enter all amounts as positive numbers.

Marshall Inc.

Variable Costing Income Statement

1		28,800 Units Manufactured	36,000 Units Manufactured
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3
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5
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8
9
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12
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14

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?

The difference is caused by the variance in sales levels.

The difference is caused by the amount of fixed factory overhead cost included in the ending inventory.

The difference is caused by management error in setting production levels.

Answer 1

Ques 1 Absorption costing income statement Units 28,800 36,000 Sales Cost of goods sold Cost of goods manufactured: 28,800 units × $68.70* 36000 units x $67.16** Less inventory, July 31 (1,600 units × $49) Cost of goods sold Gross profit Selling and administrative expenses Income from operations 2,304,000 $1,978,560 $2,417,760 483,552 $1,978,560 $1,934,208 369,792 64,600 305,192 325,440!$ 64,600$ 260,840 $ Unit cost of goods manufactured* DM DL variable factory overhead fixed factory overhead total unit cost 44.00 11.00 6.00 7.70 68.70 Unit cost of goods manufactured** DM DL variable factory overhead fixed factory overhead 221760/36000 total unit cost 44.00 11.00 6.00 6.16 67.16

Ques 2 Variable costing Units Sales Variable cost of goods sold Variable cost of goods manufactured 28,800 units × $61.00* 36,000 units x $61.00* Less inventory, July 31 (1,600 units x $45.00) Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed factory overhead Fixed selling and administrative expenses Total fixed costs Income from operations 28,800 2,304,0002 36,000 2,304,000 1,756,800 1,756,800 547,200 35,800 511,400 2,196,000 439,200 1,756,800 547,200 35,800 511,400 221,760 28,800 250,560 260,840 221,760 28,800 250,560 260,840 Unit cost of goods manufactured* DM DL variable factory overhead Total unit variable cost 6 61 Ques 3 The difference is caused by the amount of fixed factory overhead cost included in the ending inventory the increase in income from operatiiom under absorption costing is caused by the allocation of 221760 fixed overhead cost over a larger number of units.Thus the COGS is the difference can also be explained by the amount of overhead cost included in the 44,352 less by the amount fixed factory 36,000 ending inventory