Variable and Absorption Costing-Three 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 Statements-Absorption Costing For the Year Ended December 31, 20Y1 Cross Training Shoes Golf Shoes Running Shoes Revenues $5,800,000 $6,900,000 $4,200,000 Cost of goods sold (3,016,000) (3,381,000) (2,814,000) Gross profit $2,784,000 $3,519,000 $1,386,000 Selling and administrative expenses (2,436,000) (2,484,000) (2,142,000) Operating income $348,000 $1,035,000 $(756,000) In addition, you have determined the following information with respect to allocated fixed costs: Cross Golf Running Training Shoes Shoes Shoes Fixed costs: Cost of goods sold Selling and administrative expenses $928,000 696,000 $897,000 828,000 $798,000 588,000 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 $756,000. Total fixed costs $ 1,624,000 9 1,725,000 9 1.386.UUU Operating income (loss) 348,000 $ 1,035,000 $ -756,000 Feedback c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes. and the fixed costs would not be eliminated. Thus, the profit of the company would actually decline by $ 1,386,00 X. Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing If the running shoe line were eliminated, then the contribution margin of the product line would be eliminated volume, or reducing costs. Feedback Check My Work