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 $31,20$Y$1$

Cross Training Shoes Golf Shoes Running Shoes

Revenues $$501,700$ $$306,000$ $$254,000$

Cost of goods sold $(260,900)(149,900)(170,200)$

Gross profit $$240,800$ $$156,100$ $$83,800$

Selling and administrative expenses $(207,100)(112,400)(139,900)$

Operating income $$33,700$ $$43,700$ $$(56,100)$

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 $$80,300$ $$39,800$ $$35,600$

Selling and administrative expenses $60,20036,70035,600$

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 $$56,100.$

Question Content Area

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.

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.

Winslow Inc.

Variable Costing Income Statements$$Three Product Lines

For the Year Ended December $31,20$Y$1$

Cross Training Shoes Golf Shoes Running Shoes

Revenues

$Revenues

$Revenues

$Revenues

Variable cost of goods sold

Variable cost of goods sold

Variable cost of goods sold

Variable cost of goods sold

Manufacturing margin

$Manufacturing margin

$Manufacturing margin

$Manufacturing margin

Variable selling and administrative expenses

Variable selling and administrative expenses

Variable selling and administrative expenses

Variable selling and administrative expenses

Contribution margin

$Contribution margin

$Contribution margin

$Contribution margin

Fixed costs:

Fixed manufacturing costs

$Fixed manufacturing costs

$Fixed manufacturing costs

$Fixed manufacturing costs

Fixed selling and administrative expenses

Fixed selling and administrative expenses

Fixed selling and administrative expenses

Fixed selling and administrative expenses

Total fixed costs $fill in the blank c$4494$b$00$bfe$4$ff$2\_29$

$fill in the blank c$4494$b$00$bfe$4$ff$2\_30$

$fill in the blank c$4494$b$00$bfe$4$ff$2\_31$

Operating income $($loss$)$ $fill in the blank c$4494$b$00$bfe$4$ff$2\_32$

$fill in the blank c$4494$b$00$bfe$4$ff$2\_33$

$fill in the blank c$4494$b$00$bfe$4$ff$2\_34$

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

be eliminated

and the fixed costs

would not

be eliminated. Thus, the profit of the company would actually

decline

by $fill in the blank $651203$fa$2$fa$6000\_4$

$.$ Management should keep the line and attempt to improve the profitability of the product by

increasing

prices,

increasing

volume, or

reducing

costs.

Feedback Area

Feedback

Consider the impact the elimination of the running shoe line would have on sales as well as variable and fixed costs.