Question

Variable and Absorption Costing—Three Products Shoes R' Us, Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows: Shoes R' Us, Inc. Product Income Statements—Absorption Costing For the Year Ended December 31, 2016 Athletic Shoes Casual Shoes Work Shoes Revenues $405,200 $239,100 $198,500 Cost of goods sold 210,700 117,200 133,000 Gross profit $194,500 $121,900 $65,500 Selling and administrative expenses 167,300 87,800 109,400 Income from operations $27,200 $34,100 $-43,900 In addition, you have determined the following information with respect to allocated fixed costs: Athletic Shoes Casual Shoes Work Shoes Fixed costs: Cost of goods sold $64,800 $31,100 $27,800 Selling and administrative expenses 48,600 28,700 27,800 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 work shoe line as unacceptable. As a result, it has decided to eliminate the work shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the work shoe line, management expects the profits of the company to increase by $43,900.

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 work shoes will not be avoided if the line is eliminated.

b. Prepare a variable costing income statement for the three products. If a net loss is incurred, enter that amount as a negative number using a minus sign. Enter all other amounts as positive numbers

.c. Use the report in (b) to determine the profit impact of eliminating the work shoe line, assuming no other changes. If the work shoe 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 $_ ?

Answer 1