Question

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	$366,100		$219,700		$191,100
Cost of goods sold	(190,400)		(107,700)		(128,000)
Gross profit	$175,700		$112,000		$63,100
Selling and administrative expenses	(151,100)		(80,600)		(105,400)
Operating income	$24,600		$31,400		$(42,300)

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	$58,600		$28,600		$26,800
Selling and administrative expenses	43,900		26,400		26,800

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 $42,300.

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.

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, 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	$	$	$
Operating income (loss)	$	$	$

c. Use the report in (b) to determine the profit impact of eliminating the running shoe 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.

Answer 1

Answer of part (a) is written correctly.