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	$360,800		$212,900		$181,000
Cost of goods sold	187,600		104,300		121,300
Gross profit	$173,200		$108,600		$59,700
Selling and administrative expenses	149,000		78,200		99,700
Income (loss) from operations	$24,200		$30,400		$(40,000)

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	$57,700		$27,700		$25,300
Selling and administrative expenses	43,300		25,500		25,300

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 $40,000.

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.

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	$	$	$
Variable cost of goods sold
Manufacturing margin	$	$	$
Variable selling and administrative expenses
Contribution margin	$	$	$
Fixed costs:
Fixed manufacturing costs	$	$	$
Fixed selling and administrative expenses
Total fixed costs	$	$	$
Income from operations	$	$	$

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 be eliminated and the fixed costs would not be eliminated. Thus, the profit of the company would actually decline by $. Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs.