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Variable and Absorption CostingThree Products

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

Line Item Description	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	$398,800	$231,300	$194,300
Cost of goods sold	(207,400)	(113,300)	(130,200)
Gross profit	$191,400	$118,000	$64,100
Selling and administrative expenses	(164,600)	(85,000)	(107,000)
Operating income	$26,800	$33,000	$(42,900)

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

Line Item Description	Cross Training Shoes	Golf Shoes	Running Shoes
Fixed costs:
Cost of goods sold	$63,800	$30,100	$27,200
Selling and administrative expenses	47,900	27,800	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 $42,900.

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a. Are managements decision and conclusions correct? Managements decision and conclusion are fill in the blank 1 of 3

correctincorrectincorrect

. The profit fill in the blank 2 of 3

willwill notwill not

be improved because the fixed costs used in manufacturing and selling running shoes fill in the blank 3 of 3

willwill notwill not

be avoided if the line is eliminated.

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Feedback

Consider the impact the elimination of the running shoe line would have on the fixed costs.

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

Line Item Description	Cross Training Shoes	Golf Shoes	Running Shoes
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesRevenues	$Revenues	$Revenues	$Revenues
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesVariable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesManufacturing margin	$Manufacturing margin	$Manufacturing margin	$Manufacturing margin
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesContribution margin	$Contribution margin	$Contribution margin	$Contribution margin
Fixed costs:
Fixed contribution marginFixed manufacturing costsFixed salesVariable cost of goods manufacturedVariable cost of goods soldFixed manufacturing costs	$Fixed manufacturing costs	$Fixed manufacturing costs	$Fixed manufacturing costs
Fixed selling and administrative expensesFixed manufacturing marginVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses
Total fixed costs	$Total fixed costs	$Total fixed costs	$Total fixed costs
Operating income (loss)	$Operating income (loss)	$Operating income (loss)	$Operating income (loss)

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Feedback

When recasting the variable costing income statement, remember that under variable costing, all fixed factory overhead costs are deducted in the period incurred. Revenues - Variable Cost of Goods Sold = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative Expenses = Contribution Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Operating income

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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 fill in the blank 1 of 7

be eliminatedincreasebe eliminated

and the fixed costs fill in the blank 2 of 7

wouldwould notwould not

be eliminated. Thus, the profit of the company would actually fill in the blank 3 of 7

declineimprovedecline

by fill in the blank 4 of 7$. Management should keep the line and attempt to improve the profitability of the product by fill in the blank 5 of 7

decreasingincreasingincreasing

prices, fill in the blank 6 of 7

decreasingincreasingincreasing

volume, or fill in the blank 7 of 7

increasingreducingreducing

costs.