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 1 Cross Training Shoes Golf Shoes Running Shoes 2 Revenues $880,000.00 $685,000.00 $635,000.00 3 Cost of goods sold 420,000.00 339,200.00 416,000.00 4 Gross profit $460,000.00 $345,800.00 $219,000.00 5 Selling and administrative expenses 411,200.00 243,800.00 362,300.00 6 Income (Loss) from operations $48,800.00 $102,000.00 $(143,300.00) In addition, you have determined the following information with respect to allocated fixed costs: 1 Cross Training Shoes Golf Shoes Running Shoes 2 Fixed costs: 3 Cost of goods sold $127,500.00 $89,700.00 $120,000.00 4 Selling and administrative expenses 94,300.00 82,400.00 143,300.00 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 $143,300. Required: a. Do you agree with management’s decision and conclusions? Explain your answer. (Note: You may wish to complete part (b), the variable costing income statement, first.) b. Prepare a variable costing income statement for the three products. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. 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 running shoe line, assuming no other changes. Use the minus sign to indicate a decline in profit. Labels December 31, 20Y1 Fixed costs For the Year Ended December 31, 20Y1 Amount Descriptions Contribution margin Contribution margin ratio Fixed manufacturing costs Fixed selling and administrative expenses Income (Loss) from operations Manufacturing margin Revenues Sales mix Total fixed costs Variable cost of goods sold Variable selling and administrative expenses b. Prepare a variable costing income statement for the three products. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. Enter all other amounts as positive numbers. Score: 86/156 Winslow Inc. Variable Costing Income Statement—Three Product Lines For the Year Ended December 31, 20Y1 ✔ 1 Cross Training Shoes Golf Shoes Running Shoes 2 Revenues ✔ $880,000.00 ✔ $685,000.00 ✔ $635,000.00 ✔ 3 Variable cost of goods sold ✔ 292,500.00 ✔ 249,100.00 302,750.00 4 Manufacturing margin ✔ $587,500.00 ✔ $455,900.00 $322,250.00 5 Variable selling and administrative expenses ✔ 319,400.00 17,500.00 203,000.00 6 Contribution margin ✔ $268,100.00 $276,400.00 $119,250.00 7 Fixed costs: ✔ 8 Fixed manufacturing costs ✔ $126,500.00 $90,500.00 $119,250.00 9 Fixed selling and administrative expenses ✔ 94,600.00 83,000.00 142,000.00 10 Total fixed costs ✔ $22,100.00 $173,500.00 $261,250.00 11 Income (Loss) from operations ✔ $47,000.00 $102,900.00 $(142,000.00) Points: 20.95 / 38 Check My Work 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

Answer 1

a. Management's decision and conclusion are incorrect. The profit would not be improved because the fixed costs used in manufacturing and selling running shoes would not be avoided if the line is eliminated.

b.

	Winslow Inc.
	Variable Costing Income Statements - Three Product Lines
	For the Year Ended December 31, 20Y1
1		Cross Training Shoes	Golf Shoes	Running Shoes
2	Revenues	880000	685000	635000
3	Variable cost of goods sold	292500	249500	296000
4	Manufacturing margin	587500	435500	339000
5	Variable selling and administrative expenses	316900	161400	219000
6	Contribution margin	270600	274100	120000
7	Fixed costs:
8	Fixed manufacturing costs	127500	89700	120000
9	Fixed selling and administrative expenses	94300	82400	143300
10	Total fixed costs	221800	172100	263300
11	Income (Loss) from operations	48800	102000	-143300

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 decrease by $263,300. Management should keep the line and attempt to improve the profitability of the product by increasing prices, volume, or reducing costs.