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	$529,000		$312,100		$262,200
Cost of goods sold	275,100		152,900		175,700
Gross profit	$253,900		$159,200		$86,500
Selling and administrative expenses	218,400		114,600		144,500
Income (loss) from operations	$35,500		$44,600		$(58,000)

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	$84,600		$40,600		$36,700
Selling and administrative expenses	63,500		37,500		36,700

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 $58,000.

a. Are management’s decision and conclusions correct?

Management’s decision and conclusion are . The profit be improved because the fixed costs used in manufacturing and selling running shoes 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; 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
	$	$	$
	$	$	$
	$	$	$
Fixed costs:
	$	$	$
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 and the fixed costs be eliminated. Thus, the profit of the company would actually by $. Management should keep the line and attempt to improve the profitability of the product by prices, volume, or costs.

Answer 1

A. Management’s decision and conclusions correct :

Management’s decision and conclusion are correct . The profit be improved because the fixed costs used in manufacturing and selling decreased, running shoes be avoided if the line is eliminated.

Note : We assume that These fixed costs are used to support all three product lines seperately and will change with the elimination of any one product.

Profit of the company will increase by $58,000 due to elimination of running shoe line..