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	$385,100		$238,800		$203,000
Cost of goods sold	(200,300)		(117,000)		(136,000)
Gross profit	$184,800		$121,800		$67,000
Selling and administrative expenses	(158,900)		(87,700)		(111,900)
Operating income	$25,900		$34,100		$(44,900)

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	$61,600		$31,000		$28,400
Selling and administrative expenses	46,200		28,700		28,400

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 $44,900.

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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.

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Feedback

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

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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 margin/Manufacturing margin/RevenuesVariable cost of goods soldVariable selling expenses
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling and administrative expenses
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses
Fixed costs:
Fixed contribution marginFixed manufacturing costsFixed salesVariable cost of goods manufacturedVariable cost of goods sold
Fixed selling and administrative expensesFixed manufacturing marginVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expenses
Total fixed costs
Operating income (loss)