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	$414,500		$248,700		$208,900
Cost of goods sold	215,500		121,900		140,000
Gross profit	$199,000		$126,800		$68,900
Selling and administrative expenses	171,100		91,300		115,100
Income (loss) from operations	$27,900		$35,500		$(46,200)

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	$66,300		$32,300		$29,200
Selling and administrative expenses	49,700		29,800		29,200

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 $46,200.

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.

Feedback

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	$	$	$

Feedback

When recasting the variable costing income statement, remember that under variable costing, all fixed factory overhead costs are deducted in the period incurred. Revenues - Variable Cost of Goods Sold = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative Expenses = Contribution Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Income from Operations

Learning Objective 2 and Learning Objective 3.

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.

Answer 1

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Part 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.
Part b
		Cross Training Shoes	Golf Shoes	Running Shoes
Revenues		$                                 414,500	$                   248,700	$                   208,900
Variable cost of goods sold	COGS-Fixed	$                                 149,200	$                     89,600	$                   110,800
Manufacturing margin		$                                 265,300	$                   159,100	$                     98,100
Variable selling and administrative expenses	Total-Fixed	$                                 121,400	$                     61,500	$                     85,900
Contribution margin		$                                 143,900	$                     97,600	$                     12,200
Fixed costs:
Fixed manufacturing costs		$                                   66,300	$                     32,300	$                     29,200
Fixed selling and administrative expenses		$                                   49,700	$                     29,800	$                     29,200
Total fixed costs		$                                 116,000	$                     62,100	$                     58,400
Income from operations		$                                   27,900	$                     35,500	$                   (46,200)
Part 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 $ 12,200.
Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume, or reducing costs.