Income Statements under Absorption Costing and Variable Costing Gallatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity during the first month. The following data summarize the results for Ju $1,650,000 Sales (16,500 units) Production costs (21,000 units): Direct materials $777,000 Direct labor 373,800 Variable factory overhead 186,900 Fixed factory overhead 123,900 1,461,600 Selling and administrative expenses: Variable selling and administrative expenses $226,500 Fixed selling and administrative expenses 87,700 314,200 If required, round interim per-unit calculations to the nearest cent. a. Prepare an income statement according to the absorption costing concept. Gallatin County Motors Inc. Absorption Costing Income Statement For the Month Ended July 31 b. Prepare an income statement according to the variable costing concept. Gallatin County Motors Inc. Variable Costing Income Statement For the Month Ended July 31 Fixed costs: 00 C. What is the reason for the difference in the amount of operating income reported in (a) and (b)? Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the income statement will have a higher operating income. Variable and Absorption Costing-Three Products 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 Statements-Absorption Costing For the Year Ended December 31, 2011 Cross Training Shoes Golf Shoes Running Shoes Revenues $482,700 $289,600 $243,300 Cost of goods sold (251,000) (141,900) (163,000) $231,700 $147,700 $80,300 Gross profit Selling and administrative expenses Operating income (199,300) (106,300) (134,100) $32,400 $41,400 $(53,800) 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 $77,200 $37,600 $34,100 Selling and administrative expenses 57,900 34,800 34,100 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 $53,800. a. Are management's decision and conclusions correct? Management's decision and conclusion are The profit be improved because the fixed costs used in manufacturing and selling running shoes be avoided if the line is eliminated. 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 Statements-Three Product Lines For the Year Ended December 31, 20Y1 Cross Training Shoes Golf Shoes Running Shoes $ Fixed costs: 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 by $ . Management should keep the line and attempt to improve the profitability of the product by and the fixed costs prices, be eliminated. Thus, the profit of the company would actually volume, or costs