Shoes R€™ Us, Inc. manufactures and sells three types of shoes. The income statements prepared under absorption costing method for the three shoes are as follows:

In addition, you have determined the following information with respect to allocated fixed costs:

These fixed costs are used to support all three product lines. In addition, you have determined that the inventory is negligible. The management of the company has deemed the profit performance of the dress shoe line as unacceptable. As a result, it has decided to eliminate the dress shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the dress shoe line, management expects the profits of the company to increase by $85,500.
a. Do you agree with management€™s decision and conclusions?
b. Prepare a variable costing income statement for the three products.
c. Use the report in (b) to determine the profit impact of eliminating the dress shoe line, assuming no other changes.

Transcribed Image Text:

Shoes R' Us, Inc. Product Income Statements-Absorption Costing For the Year Ended December 31, 2012 Play Shoes Dress Shoes Party Shoes Revenues .... Cost of goods sold. Gross profit..... Selling and administrative expenses Income from operations... $522,000 270,000 $252,000 216,000 $ 36,000 $378,000 $441,000 216,000 252,000 $225,000 162,000 $ 63,000 $126,000 211,500 $ (85,500) Party Shoes Play Shoes Dress Shoes Fixed costs: Cost of goods sold Selling and administrative expenses . $81,000 63,000 $58,500 54,000 $72,000 ...... 72,000