Question

Estimated Income Statements, using Absorption and Variable Costing

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

Sales (12,800 x $45)	$576,000
Manufacturing costs (12,800 units):
Direct materials	350,720
Direct labor	83,200
Variable factory overhead	38,400
Fixed factory overhead	46,080
Fixed selling and administrative expenses	12,500
Variable selling and administrative expenses	15,200

The company is evaluating a proposal to manufacture 14,400 units instead of 12,800 units, thus creating an ending inventory of 1,600 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. 1. Prepare an estimated income statement, comparing operating results if 12,800 and 14,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	12,800 Units Manufactured	14,400 Units Manufactured
Sales	$	$
Cost of goods sold:
Cost of goods manufactured	$	$
Inventory, October 31
Total cost of goods sold	$	$
Gross profit	$	$
Selling and administrative expenses
Operating income	$	$

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a. 2. Prepare an estimated income statement, comparing operating results if 12,800 and 14,400 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	12,800 Units Manufactured	14,400 Units Manufactured
Sales	$	$
Variable cost of goods sold:
Variable cost of goods manufactured	$	$
Inventory, October 31
Total 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	$	$
Operating income	$	$

Answer 1

Variable cost of goods sold = (Direct Material + Direct labor + Variable Factory Overhead) / Number of Units

= ($350,720 + $83,200 + $38,400) / 12,800 units

= $472,320 / 12,800 units

= $36.90 per unit

Requirement A1:

	12,800	units	14,400	units
Sales		$ 576,000		$ 576,000
Cost of goods sold:
Cost of goods manufactured	$ 518,400		$ 577,440
Inventory, October 31	$                  -		$          64,160
Total Cost of goods sold		$ 518,400		$ 513,280
Gross Profit		$          57,600		$          62,720
Selling and Administrative Expenses		$          27,700		$          27,700
Operating Income		$          29,900		$          35,020

Requirement A2:

	12,800	units	14,400	units
Sales		$ 576,000		$ 576,000
Variable Cost of goods Sold:
Variable cost of goods manufactured	$ 472,320		$ 531,360
Inventory, October 31	$                  -		$          59,040
Total Variable Cost of goods sold		$ 472,320		$ 472,320
Manufacturing Margin		$ 103,680		$ 103,680
Variable Selling and Admin Expenses		$          15,200		$          15,200
Contribution Margin		$          88,480		$          88,480
Fixed Costs:
Fixed Factory Overheads	$          46,080		$          46,080
Fixed Selling and Admin Expenses	$          12,500		$          12,500
Total Fixed Costs		$          58,580		$          58,580
Operating Income		$          29,900		$          29,900