Variable and Absorption Costing--Three Products shoes. The income statements prepared under the absorption costing method for the three shoes are Winslow Inc. manufactures and sells three types as follows: Winslow Inc. Product Income Statements-Absorption Costing For the Year Ended December 31, 2011 Cross Training Shoes Golf Shoes Running Shoes Revenues $515,400 $314,400 $273,500 Cost of goods sold (268,000) (154,100) (183,200) Gross profit $247,400 $160,300 $90,300 Selling and administrative expenses (212,800) (115,400) (150,800) Operating income $34,600 $44,900 $(60,500) 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 $82,500 $40,900 $38,300 Selling and administrative expenses 61,800 37,700 38,300 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 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 shoeline, management expects the profits of the company to increase by $60,500. a. Are management's decision and conclusions correct? Management's decision and condusion 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 Check My Wort 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. 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, 2011 Cross Training Shoes Golf Shoes Running Shoes Revenues 515400 314.400 273,500 185,500 Variable cost of goods sold 113,200 142,900 329,900 201.200 130,600 Manufacturing margin Variable selling and administrative expenses Contribution margin 77,700 151,000 112.500 178,900 123,500 18.100X Fixed costs: 82,500 40,900 38,300 Fixed manufacturing costs Fixed selling and administrative expenses 61.800 37.700 38,300 144,300 Total fixed costs 78,600 76,600 34,600 44,900 Operating Income (loss) -58,500 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 $ 76,600 X . Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs
