Variable and Absorption Costing$$Three 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:

Fleet$-$of$-$Foot Inc.

Product Income Statements$$Absorption Costing

For the Year Ended December $31$

Line Item Description Cross Training Shoes Golf Shoes Running Shoes

Revenues $$428,500$ $$248,500$ $$213,700$

Cost of goods sold $(222,800)(121,800)(143,200)$

Gross profit $$205,700$ $$126,700$ $$70,500$

Selling and administrative expenses $(176,900)(91,200)(117,700)$

Operating income $$28,800$ $$35,500$ $$(47,200)$

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 $$68,600$ $$32,300$ $$29,900$

Selling and administrative expenses $51,40029,80029,900$

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 $$47,200.$

Question Content Area

a$.$ Are management$$s decision and conclusions correct?

Management$$s decision and conclusion are fill in the blank $1$ of $3$

incorrect

$.$ The profit fill in the blank $2$ of $3$

will not

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

will not

be avoided if the line is eliminated.

Feedback Area

Feedback

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

Question Content Area

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

Fleet$-$of$-$Foot Inc.

Variable Costing Income Statements$$Three Product Lines

For the Year Ended December $31$

Line Item Description Cross

Training

Shoes

Golf

Shoes

Running

Shoes

$$-$ Select $-$

$$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$$-$ Select $-$

$$-$ Select $-$

Fixed costs:

$$-$ Select $-$

$$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

Total fixed costs $Total fixed costs

$Total fixed costs

$Total fixed costs

Operating income $($loss$)$ $Operating income $($loss$)$

$Operating income $($loss$)$

$Operating income $($loss$)$

Feedback Area

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

Question Content Area

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 eliminated

and the fixed costs fill in the blank $2$ of $7$

would not

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

decline

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 $7$

increasing

prices, fill in the blank $6$ of $7$

increasing

volume, or fill in the blank $7$ of $7$

reducing