Chapter 7, Problem 8E

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:

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. a. Prepare an estimated income 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. b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement?