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:

Fleet-of-Foot Inc. Product Income StatementsAbsorption Costing For the Year Ended December 31

Line Item Description	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	$12,000,000	$14,000,000	$9,000,000
Cost of goods sold	(6,000,000)	(7,000,000)	(4,410,000)
Gross profit	$6,000,000	$7,000,000	$4,590,000
Selling and administrative expenses	(6,240,000)	(3,500,000)	(3,200,000)
Operating income	$(240,000)	$3,500,000	$1,390,000

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	$1,800,000	$1,400,000	$1,710,000
Selling and administrative expenses	1,440,000	700,000	900,000

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 cross training shoe line as unacceptable. As a result, it has decided to eliminate the cross training shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the cross training shoe line, management expects the profits of the company to increase by $240,000.

a.) Are managements decision and conclusions correct? Managements decision and conclusion are (fill in the blank 1 of 3) correct/incorrect. The profit (fill in the blank 2 of 3) will/will not be improved because the fixed costs used in manufacturing and selling cross training shoes (fill in the blank 3 of 3) will/will not be avoided if the line is eliminated.

b.)

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 StatementsThree Product Lines For the Year Ended December 31

Line Item Description	Cross Training Shoes	Golf Shoes	Running Shoes.
.
.
			.
	.
FIxed Cost:
			.
			.
Total fixed costs	.
Operating income (loss)			.

c.) Use the report in (b) to determine the profit impact of eliminating the cross training shoe line, assuming no other changes. If the cross training shoe line were eliminated, then the contribution margin of the product line would (fill in the blank 1 of 7) be eliminated/increase and the fixed costs (fill in the blank 2 of 7) would/would not be eliminated. Thus, the profit of the company would actually (fill in the blank 3 of 7) decline/improve 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) decreasing/increasing prices, (fill in the blank 6 of 7) decreasing/increasing volume, or (fill in the blank 7 of 7) increasing/reducing costs.