Question

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	$396,100		$229,700		$199,800
Cost of goods sold	206,000		112,600		133,900
Gross profit	$190,100		$117,100		$65,900
Selling and administrative expenses	163,500		84,300		110,100
Income (loss) from operations	$26,600		$32,800		$(44,200)

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	$63,400		$29,900		$28,000
Selling and administrative expenses	47,500		27,600		28,000

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 $44,200.

a. Are management’s decision and conclusions correct?

Management’s 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.

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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 Statements—Three 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	$	$	$

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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.

I tried $56,000 and it did not work, please help. I only need to blank answer for the third part of the problem

Answer 1

Note : Since the a part has already been answered above and that is correct as well, we have not answered the same. We have answered B and C parts as follows :

B.

Winslow Inc.
Variable Costing Income Statements—Three Product Lines
For the Year Ended December 31, 20Y1
	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	3,96,100	2,29,700	1,99,800
Variable cost of goods sold	1,42,600	82,700	1,05,900
Manufacturing margin	2,53,500	1,47,000	93,900
Variable selling and administrative expenses	1,16,000	56,700	82,100
Contribution margin	1,37,500	90,300	11,800
Fixed costs:
Fixed manufacturing costs	63,400	29,900	28,000
Fixed selling and administrative expenses	47,500	27,600	28,000
Total fixed costs	1,10,900	57,500	56,000
Income from operations	26,600	32,800	-44,200

C.

The profit of the company will decline by $11,800.

This is because currently running shows division has a loss of $44,200. If we were to remove the division altogether, it will only be left with fixed expenses of $56,000 which could also be interpreted as a loss of $56,000. Hence the additional loss if running shoes division would be discontinued will be 56,000-44,200 = $11,800