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, 2011 Cross Training Shoes Golf Shoes Running Shoes Revenues $207,800 Cost of goods sold (139,200) Gross profit $439,300 (228,400) $210,900 (181,400) $29,500 $250,400 (122,700) $127,700 (91,900) $35,800 $68,600 Selling and administrative expenses Operating income (114,600) 46,000) 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 $70,300 $32,600 $29.100 Selling and administrative expenses 52.700 30,000 29.100 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. Variable Costing Income Statements Three Product Lines For the Year Ended December 31, 2011 Cross Training Shoes Goll Shoes $ 439.300 $ 250,400 Vanable cost of goods sold Manufacturing margin Variable siling and administrative expenses Contribution margin Fuced costs: Fixed manufacturing costs Find selling and administrative expenses Total faxed costs Operating income doss) c. Use the report in (b) to determine the profit impact of eliminating the running shoeline, assuming no other changes. If the running shoes newer eliminated, then the contribution margin of the product line would be eliminated and the costs would compary would actually decline by Management should keep the line and attempt to improve the ability or product by c volume, or reducing costs. be liminated. Thus, the profit of the r ices sing Fixed costs: Cost of goods sold $70,300 $32,600 $29,100 Selling and administrative expenses 52,700 30,000 29,100 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 $46,000. a. Are management's decision and conclusions correct? Management's decision and conclusion are incorrect . The profit will not selling running shoes will not be avoided if the line is eliminated. be improved because the fixed costs used in manufacturing and Feedback Check My Work Consider the impact the elimination of the running shoe line would have on the fixed costs. 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 Statements-Three Product Lines For the Year Ended December 31, 2011 Previous Next >