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 $402,300 $249,400 $212,000 Cost of goods sold (209,200) (122,200) (142,000) Gross profit $193,100 $127,200 $70,000 Selling and administrative expenses (166,100) (91,600) (116,900) Operating income $27,000 $35,600 $(46,900) 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 $64,400 $32,400 $29,700 Selling and administrative expenses 48,300 29,900 29,700 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 comoan deemed the bottoncformance of the ninnie thone Accentahle Art decided to eliminate the running shoe 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 fine. 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 $46,900. a. Are management's decision and conclusions correct? Management's decision and conclusion are incorrect The profit will not be improved because the fixed costs used in manufacturing and selling running shoes will not _ be avoided if the line is eliminated. I Feedback Check My Wor Consider the impact the elimination of the running shoe line would have on the fixed costs b. Prepare a variable costing income statement for the three products, inter a niet 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 Revenues Variable cost of goods sold Manufacturing margin Variable selling and administrative compenses Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Total fixed costs Operating Income (loss) 1000 Feedback Check My Work 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 Morgin: Manufacturing Margin Variable Selling and Administrative Expenses - Contribution Margin; contribution Maroin - (Fixed Manufacturing Costs + Fixed selling and Administrative Expenses) - Operating income + c. Use the report in (b) to determine the profit impact of eliminating the running shoe fine, assuming no other changer. 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 Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs. Foto Check My World Consider the impact the elimination of the running shoeline would have on sales as well as variable and fixed costs. Income statements under absorption 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 July: Sales (3,000 units) $1,920,000 Production costs (3,000 units): Direct materials $825,600 Direct labor 354,900 Variable factory overhead 57,900 Fixed factory overhead 90,900 1,329,300 Selling and administrative expenses: Variable selling and administrative expenses $41,200 Fixed selling and administrative expenses 17,300 This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. 58,500 TH Openyspreadsheet 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 Sales $ Cost of goods sold Gross profit Selling and administrative expenses Operating income $ 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 Sales Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs Fixed factory overhead costs 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 Sales Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs Vixed factory overhead costs Fixed selling and administrative expenses Tot fixed costs Operating income c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)? Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing 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 absorption costing income statement will have a higher Operating income than will the variable costing income statement Income statements under absorption costing and variable costing Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (146,000 units) during the first month, creating an ending inventory of 21,000 units. During February, the company produced 125,000 units during the month but sold 146,000 units at $550 per unit. The February manufacturing costs and selling and administrative expenses were as follows: Number of Unit Total Units Cost Cost Manufacturing costs in February 1 beginning inventory! Variable 21,000 $275.00 $5,775,000 Fixed 21,000 24.00 504,000 Total $299.00 $6,279,000 Manufacturing costs in February Variable 125,000 $275.00 $34,375,000 Fixed 125,000 27.70 3,462,500 $302.70 $37,837,500 Selling and administrative expenses in February Variable 146,000 18.50 $2,701,000 Fixed 115,000 3.00 438,000 Total 21.50 $3,139,000 Total This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below a. Prepare an income statement according to the absorption costing concept for February. Enter all amounts as positive numbers. Fresno Industries Inc. Absorption Costing Income Statement For the Month Ended February 28 Sales Cost of goods sold: Beginning inventory Cost of goods manufactured Total cost of goods sold Gross profit Selling and administrative expenses Operating income b. Prepare an income statement according to the variable costing concept for February. Enter all amounts as positive numbers, Fresno Industries Inc. Variable Costing Income Statement For the Month Ended February 24 Sales Variable cost of goods sold DIUI Manufacturing margin Variable selling and administrative expenses Operating income b. Prepare an income statement according to the variable costing concept for February. Enter all amounts as positive numbers. Fresno Industries Inc. Variable Costing Income Statement For the Month Ended February 28 Sales 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 c. What is the reason for the difference in the amount of Operating Income reported in (a) and (b)? Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing 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 decreases, the absorption costing Income statement will have a lower Operating income