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

		Marshall Inc.
		Unit Product Cost & Sold
		Present	Propsoal
	Beginning Inventory		0
	Production	28800	36000
	Sales	28800	28800
	Ending Inventory	0	7200
		Unit Product Cost under absorption costing
		Present	Proposal
	Direct Material=($1209600/28800)	$                             42.00	$                              42.00
	Direct Labor=($288000/28800)	$                             10.00	$                              10.00
	Variable Manufacturing Overhead=($115200/28800)	$                               4.00	$                                 4.00
	Fixed Manufacturing Overhead=($221760/28800 Units) in Present,($221760/36000) in Proposal	$                               7.70	$                                 6.16
	Unit Product Cost	$                             63.70	$                              62.16
	Income Statement under Absorption costing
	Year	Present	Proposal
	Sales=(28800*$90)	$              2,592,000.00	$                2,592,000.00
	Cost of goods sold(28800*63.70) in Present and (28800*$62.16) in Proposal	$              1,834,560.00	$                1,790,208.00
	Gross Margin	$                  757,440.00	$                    801,792.00
	Less: Selling & Administerative Expenses=($29400+$35400)	$                    64,800.00	$                      64,800.00
	Net Operating Income	$                  692,640.00	$                    736,992.00
		Present	Proposal
	Direct Material	$                             42.00	$                              42.00
	Direct Labor	$                             10.00	$                              10.00
	Variable Manufacturing Overhead	$                               4.00	$                                 4.00
	Unit Product Cost	$                             56.00	$                              56.00
	Income Statement under Variable Costing
		Present	Proposed
	Sales=(28800*$90)	$              2,592,000.00	$                2,592,000.00
	Variable Expenses
	Variable Cost of goods sold(28800*$56)	$              1,612,800.00	$                1,612,800.00
	Variable Selling & Administerative expenses	$                    35,400.00	$                      35,400.00
	Cotribution Margin	$                  943,800.00	$                    943,800.00
	Fixed Expenses
	Fixed Manufacturing Expenses	$                  221,760.00	$                    221,760.00
	Fixed Selling & Administerative Expenses	$                    29,400.00	$                      29,400.00
	Net Operating Profit	$                  692,640.00	$                    692,640.00
	Reconciliation
	Year	Present	Proposed
	Net Income under Absorption Costing	$                  692,640.00	$                    692,640.00
	Add: Fixed Manufacturing Overhead Cost in Inventory of Proposal=(Stock * Fixed Manufacturing Cost)=7200*$6.16		$                      44,352.00
	Net Income underAbsorption Costing	$                  692,640.00	$                    736,992.00
	Difference arises dur tofixed cost of Inventory which is in hand(36000-28800)*$6.16