Variable and Absorption Costing-Three Products Winsiow 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, 20Y1 In addition, you have determined the following information with respect to allocated fixed costs: 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 $60,000. a. Are management's decision and conclusions correct? Management's decision and conclusion are incarnt- . The profit millat - > be improved because the fixed costs used avoided if the line is eliminated. b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number 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 $60,000. a. Are management's decision and conclusions correct? Management's decision and conclusion are msamat * . The profit witure be improved because the fixed costs used in manufacturing and selling running shoes mill avoided if the line is eliminated. 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 Feedaack 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 Feedback + Clais ak mose 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 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 tareminated and the fixed costs mulinut be eliminated. Thus, the profit of the company would actually ateline- - by $ - Management should keep the line and attempt to improve the profitability of the product by fermana: prices, volume, or tritudas: > costs. Feedback Consider the impact the elimination of the running shoe line would have on sales as well as variable and fixed costs. Feedback Patlaly bected
