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	$559,800		$324,700		$269,500
Cost of goods sold	291,100		159,100		180,600
Gross profit	$268,700		$165,600		$88,900
Selling and administrative expenses	231,100		119,200		148,500
Income (loss) from operations	$37,600		$46,400		$(59,600)

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	$89,600		$42,200		$37,700
Selling and administrative expenses	67,200		39,000		37,700

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 $59,600.

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	$	$	$

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.

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Answer 1

(a) 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.

(b)

	Cross training shoes	Golf shoes	Running shoes
Revenue	559,800	324,700	269,500
Less: Variable COGS	201,500	116,900	142,900
Manufacturing margin	358,300	207,800	126,600
Less: Variable selling and admin expense	163,900	80,200	110,800
Contribution margin	194,400	127,600	15,800
Less: Fixed cost
Fixed mfg cost	89,600	42,200	37,700
Fixed selling and admin exp	67,200	39,000	37,700
Total fixed costs	156,800	81,200	75,400
Operating Income/ (Loss)	37,600	46,400	(59,600)

Working Notes:

	Cross training shoes	Golf shoes	Running shoes
COGS [A]	291,100	159,100	180,600
Selling and admin expenses [B]	231,100	119,200	148,500
Fixed cost
Fixed mfg cost [C]	89,600	42,200	37,700
Selling and admin exp [D]	67,200	39,000	37,700
Variable cost
COGS [A - C]	201,500	116,900	142,900
Selling and admin exp [B - D]	163,900	80,200	110,800

(c) 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 $15,800. Management should keep the line and attempt to improve the profitability of the product by increasing sales prices, increasing volume, or reducing costs.