7.2.3

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 (25,600 x $91)	$2,329,600
Manufacturing costs (25,600 units):
Direct materials	1,400,320
Direct labor	332,800
Variable factory overhead	153,600
Fixed factory overhead	184,320
Fixed selling and administrative expenses	50,100
Variable selling and administrative expenses	60,600

The company is evaluating a proposal to manufacture 28,800 units instead of 25,600 units, thus creating an ending inventory of 3,200 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.

a. 1. Prepare an estimated income statement, comparing operating results if 25,600 and 28,800 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
	25,600 Units Manufactured	28,800 Units Manufactured
Sales	$fill in the blank c13171054029037_2	$fill in the blank c13171054029037_3
Cost of goods sold:
Cost of goods manufactured	$fill in the blank c13171054029037_5	$fill in the blank c13171054029037_6
Inventory, October 31	fill in the blank c13171054029037_8	fill in the blank c13171054029037_9
Total cost of goods sold	$fill in the blank c13171054029037_11	$fill in the blank c13171054029037_12
Gross profit	$fill in the blank c13171054029037_14	$fill in the blank c13171054029037_15
Selling and administrative expenses	fill in the blank c13171054029037_17	fill in the blank c13171054029037_18
Operating income	$fill in the blank c13171054029037_20	$fill in the blank c13171054029037_21

a. 2. Prepare an estimated income statement, comparing operating results if 25,600 and 28,800 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
	25,600 Units Manufactured	28,800 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	$___	$____

Winslow Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows:

Winslow Inc. Product Income StatementsAbsorption Costing For the Year Ended December 31, 20Y1
	Cross Training Shoes		Golf Shoes		Running Shoes
Revenues	$389,700		$226,000		$194,400
Cost of goods sold	(202,600)		(110,700)		(130,200)
Gross profit	$187,100		$115,300		$64,200
Selling and administrative expenses	(160,900)		(83,000)		(107,200)
Operating income	$26,200		$32,300		$(43,000)

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

	Cross Training Shoes		Golf Shoes		Running Shoes
Fixed costs:
Cost of goods sold	$62,400		$29,400		$27,200
Selling and administrative expenses	46,800		27,100		27,200

These fixed costs are used to support all three product lines and will not change with the elimination of any one product. In addition, you have determined that the effects of inventory may be ignored.

The management of the company has deemed the profit performance of the running shoe line as unacceptable. As a result, it has decided to eliminate the running shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the running shoe line, management expects the profits of the company to increase by $43,000.

b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign.

Winslow Inc.
Variable Costing Income StatementsThree Product Lines
For the Year Ended December 31, 20Y1
	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	$____	$____	$____
Variable cost of goods sold	_____	_____	_____
Manufacturing margin	$____	$____	$____
Variable selling and administrative expenses	_____	______	______
Contribution margin	$_____	$_____	$_____
Fixed costs:
Fixed manufacturing costs	$_____	$____	$____
Fixed selling and administrative expenses	______	______	_____
Total fixed costs	$_____	$____	$_____
Operating income (loss)	$_____	$______	$_____

c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes.

If the running shoes line were eliminated, then the contribution margin of the product line would be eliminated and the fixed costs would not be eliminated. Thus, the profit of the company would actually decline by _____?