Variable and Absorption CostingThree 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 StatementsAbsorption Costing For the Year Ended December 31, 20Y1 Cross Training Shoes Golf Shoes Running Shoes Revenues $531,600 $308,300 $259,000 Cost of goods sold 276,400 151,100 173,500 Gross profit $255,200 $157,200 $85,500 Selling and administrative expenses 219,500 113,200 142,800 Income (loss) from operations $35,700 $44,000 $(57,300) 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 $85,100 $40,100 $36,300 Selling and administrative expenses 63,800 37,000 36,300 These fixed costs are used to support all three product lines. In addition, you have determined that the inventory is negligible. 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 $57,300. a. Are managements decision and conclusions correct? Managements 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 Correct b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign; enter all other amounts as positive numbers. Winslow Inc. Variable Costing Income StatementsThree Product Lines For the Year Ended December 31, 20Y1 Cross Training Shoes Golf Shoes Running Shoes Revenues $ $ $ Variable cost of goods sold Manufacturing margin $ $ $ Variable selling and administrative expenses Contribution margin $ $ $ Fixed costs: Fixed manufacturing costs $ $ $ Fixed selling and administrative expenses Total fixed costs $ $ $ Income from operations $ $ $ 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) = Income from Operations Learning Objective 2 and Learning Objective 3. c. Use the report in (b) to determine the profit impact of eliminating the running shoes 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 $ . Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs.