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	$387,800	$236,600	$196,400
Cost of goods sold	(201,700)	(115,900)	(131,600)
Gross profit	$186,100	$120,700	$64,800
Selling and administrative expenses	(160,000)	(86,900)	(108,200)
Operating income	$26,100	$33,800	$(43,400)

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	$62,000	$30,800	$27,500
Selling and administrative expenses	46,500	28,400	27,500

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 $43,400.

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

correctincorrect

. The profit fill in the blank 2 of 3

willwill not

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

willwill not

be avoided if the line is eliminated.

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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
	$- 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)

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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 eliminatedincrease

and the fixed costs fill in the blank 2 of 7

wouldwould not

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

declineimprove

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

decreasingincreasing

prices, fill in the blank 6 of 7

decreasingincreasing

volume, or fill in the blank 7 of 7

increasingreducing

costs.