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	$536,000		$316,200		$262,400
Cost of goods sold	(278,700)		(154,900)		(175,800)
Gross profit	$257,300		$161,300		$86,600
Selling and administrative expenses	(221,300)		(116,100)		(144,600)
Operating income	$36,000		$45,200		$(58,000)

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	$85,800		$41,100		$36,700
Selling and administrative expenses	64,300		37,900		36,700

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 $58,000.

Question Content Area

a. Are managements decision and conclusions correct?

Managements decision and conclusion are

correctincorrectincorrect

. The profit

willwill notwill not

be improved because the fixed costs used in manufacturing and selling running shoes

willwill notwill not

be avoided if the line is eliminated.

Feedback Area

Feedback

Consider the impact the elimination of the running shoe line would have on the fixed costs.

Question Content Area

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 StatementsThree Product Lines For the Year Ended December 31, 20Y1

	Cross Training Shoes	Golf Shoes	Running Shoes
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesRevenues	$Revenues	$Revenues	$Revenues
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesVariable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesManufacturing margin	$Manufacturing margin	$Manufacturing margin	$Manufacturing margin
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expensesContribution margin	$Contribution margin	$Contribution margin	$Contribution margin
Fixed costs:
Fixed contribution marginFixed manufacturing costsFixed salesVariable cost of goods manufacturedVariable cost of goods soldFixed manufacturing costs	$Fixed manufacturing costs	$Fixed manufacturing costs	$Fixed manufacturing costs
Fixed selling and administrative expensesFixed manufacturing marginVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses
Total fixed costs	$fill in the blank e55b2002bf97017_29	$fill in the blank e55b2002bf97017_30	$fill in the blank e55b2002bf97017_31
Operating income (loss)	$fill in the blank e55b2002bf97017_32	$fill in the blank e55b2002bf97017_33	$fill in the blank e55b2002bf97017_34

Feedback Area

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) = Operating income

Question Content Area

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

increasebe eliminatedbe eliminated

and the fixed costs

wouldwould notwould not

be eliminated. Thus, the profit of the company would actually

improvedeclinedecline

by $fill in the blank 0d2c06031f88057_4. Management should keep the line and attempt to improve the profitability of the product by

increasingdecreasingincreasing

prices,

increasingdecreasingincreasing

volume, or

increasingreducingreducing

costs.