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	$517,700		$326,200		$283,800
Cost of goods sold	269,200		159,800		190,100
Gross profit	$248,500		$166,400		$93,700
Selling and administrative expenses	213,700		119,800		156,500
Income (loss) from operations	$34,800		$46,600		$(62,800)

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	$82,800		$42,400		$39,700
Selling and administrative expenses	62,100		39,100		39,700

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 $62,800.

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	$fill in the blank 8eddce01bfbb062_2	$fill in the blank 8eddce01bfbb062_3	$fill in the blank 8eddce01bfbb062_4
Variable cost of goods sold	fill in the blank 8eddce01bfbb062_6	fill in the blank 8eddce01bfbb062_7	fill in the blank 8eddce01bfbb062_8
Manufacturing margin	$fill in the blank 8eddce01bfbb062_10	$fill in the blank 8eddce01bfbb062_11	$fill in the blank 8eddce01bfbb062_12
Variable selling and administrative expenses	fill in the blank 8eddce01bfbb062_14	fill in the blank 8eddce01bfbb062_15	fill in the blank 8eddce01bfbb062_16
Contribution margin	$fill in the blank 8eddce01bfbb062_18	$fill in the blank 8eddce01bfbb062_19	$fill in the blank 8eddce01bfbb062_20
Fixed costs:
Fixed manufacturing costs	$fill in the blank 8eddce01bfbb062_22	$fill in the blank 8eddce01bfbb062_23	$fill in the blank 8eddce01bfbb062_24
Fixed selling and administrative expenses	fill in the blank 8eddce01bfbb062_26	fill in the blank 8eddce01bfbb062_27	fill in the blank 8eddce01bfbb062_28
Total fixed costs	$fill in the blank 8eddce01bfbb062_29	$fill in the blank 8eddce01bfbb062_30	$fill in the blank 8eddce01bfbb062_31
Income from operations	$fill in the blank 8eddce01bfbb062_32	$fill in the blank 8eddce01bfbb062_33	$fill in the blank 8eddce01bfbb062_34

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 and the fixed costs be eliminated. Thus, the profit of the company would actually by $fill in the blank 43ad18fca073055_4. Management should keep the line and attempt to improve the profitability of the product by prices, volume, or costs.