Question
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
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
correctincorrect
. The profit
willwill not
be improved because the fixed costs used in manufacturing and selling running shoes
willwill not
be avoided if the line is eliminated.
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.
Cross Training Shoes | Golf Shoes | Running Shoes | |
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses | $- Select - | $- Select - | $- Select - |
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses | - Select - | - Select - | - Select - |
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses | $- Select - | $- Select - | $- Select - |
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling and administrative expenses | - Select - | - Select - | - Select - |
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses | $- Select - | $- Select - | $- Select - |
Fixed costs: | |||
Fixed contribution marginFixed manufacturing costsFixed salesVariable cost of goods manufacturedVariable cost of goods sold | $- Select - | $- Select - | $- Select - |
Fixed selling and administrative expensesFixed manufacturing marginVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expenses | - Select - | - Select - | - Select - |
Total fixed costs | $fill in the blank dcdb8df6aff8018_29 | $fill in the blank dcdb8df6aff8018_30 | $fill in the blank dcdb8df6aff8018_31 |
Operating income (loss) | $fill in the blank dcdb8df6aff8018_32 | $fill in the blank dcdb8df6aff8018_33 | $fill in the blank dcdb8df6aff8018_34 |
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 eliminated
and the fixed costs
wouldwould not
be eliminated. Thus, the profit of the company would actually
improvedecline
by $fill in the blank 0ffbaa056fc8052_4. Management should keep the line and attempt to improve the profitability of the product by
increasingdecreasing
prices,
increasingdecreasing
volume, or
increasingreducing
costs.
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