Answer:
Western Creations Company
1. Income Statements for July and August, under absorption costing:
                                                July                   August
Sales Revenue                $4,320,000.00    $4,320,000.00
Cost of goods sold            3,240,000.00      2,649,600.00
Gross profit                      $1,080,000.00     $1,670,400.00
Total selling & admin. exp. $169,000.00       $169,000.00
Net Income                          $911,000.00     $1,501,400.00
2. Income Statements for July and August, using variable costing:
                                                    July                   August
Sales Revenue                    $4,320,000.00    $4,320,000.00
Variable cost of goods sold  3,081,600.00       2,491,200.00
Contribution margin            $1,238,400.00     $1,828,800.00
Fixed expenses:
Total fixed costs                      345,000.00         345,000.00
Net income                           $893,400.00      $1,483,800.00
3a. The reason for the differences in the amount of the income from operations in in (1) and (2) for July is the cost of goods sold based on full manufacturing costs for (1) while only variable costs are considered for (2).
3b. The reason for the differences in the amount of the income from operations in (1) and (2) for August is also the cost of goods sold based on full manufacturing costs for (1) while only variable costs are considered for (2).
Explanation:
a) Data and Calculations:
Number of hats produced = 80,000
Number of hats sold = 72,000
Ending inventory = 8,000
1 Sales $4,320,000.00
2 Manufacturing costs:             July                    August
3 Direct materials                  $1,600,000.00    $1,280,000.00
4 Direct labor                           1,440,000.00       1,152,000.00
5 Variable manufacturing cost 240,000.00         192,000.00
6 Fixed manufacturing cost      320,000.00        320,000.00
Total manufacturing costs   $3,600,000.00  $2,944,000.00
Under absorption costing:
Unit cost = $45 ($3,600,000/80,000)             $36.80 ($2,944,000/80,000)
Cost of goods sold = $3,240,000 ($45*72,000) $2,649,600 (36.8*72,000)
Ending Inventory =         360,000 ($45*8,000)         294,400 ($36.8*8,000)
7 Selling and administrative expenses:
8 Variable                                 $144,000.00       $144,000.00
9 Fixed                                         25,000.00          25,000.00
Total selling & admin.  exp.     $169,000.00      $169,000.00
Under variable costing:
2 Manufacturing costs:
3 Direct materials                    $1,600,000.00     $1,280,000.00
4 Direct labor                             1,440,000.00        1,152,000.00
5 Variable manufacturing cost   240,000.00          192,000.00
8 Variable selling & admin cost   144,000.00          144,000.00
Total variable costs =             $3,424,000.00    $2,768,000.00
Unit variable cost = $42.80 ($3,424,000/80,000)     $34.60
Cost of goods sold = $3,081,600 ($42.80 * 72,000)  $2,491,200
Ending Inventory =         342,400 ($42.80 * 8,000)         276,800
 
6 Fixed manufacturing cost    $320,000.00            $320,000.00
9 Fixed selling & admin. cost      25,000.00                25,000.00
Total fixed costs =                   $345,000.00            $345,000.00