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	$424,900		$246,400		$207,000
Cost of goods sold	220,900		120,700		138,700
Gross profit	$204,000		$125,700		$68,300
Selling and administrative expenses	175,400		90,500		114,100
Income (loss) from operations	$28,600		$35,200		$(45,800)

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	$68,000		$32,000		$29,000
Selling and administrative expenses	51,000		29,600		29,000

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 $45,800.

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

Solution

Winslow Inc

1. Correct

Explanation:

The elimination of running shoe line, would increase the profit of the company as a whole by $45,800 as the fixed costs (cost of goods sold + selling and administration costs) associated with the running shoe line be avoided.

However, in situation where the fixed costs are not avoided, then the company would report an overall loss of $58,000 if the running shoe line is eliminated, in view of loss of contribuiton margin of $12,200.

2. Variable Costing Income Statement

	Winslow Inc
	Variable Costing Income Statements - Three Product Lines
	For the year Ended Dec 31, 20Y1
	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	$424,900	$246,400	$207,000
Variable Cost of Goods Sold	$152,900	$88,700	$109,700
Manufacturing Margin	$272,000	$157,700	$97,300
Variable Selling and Administrative Expenses	$124,400	$60,900	$85,100
Contribution Margin	$147,600	$96,800	$12,200
Fixed Costs:
Fixed Manufacturing Costs	$68,000	$32,000	$29,000
Selling and Administrative Costs	$51,000	$29,600	$29,000
Total Fixed Costs	$119,000	$61,600	$58,000
Income from Operations	$28,600	$35,200	($45,800)

Notes:

The variable cost of goods sold of the three products is determined as follows,

Total cost of goods sold – fixed cost of goods sold = variable cost of goods sold

Cross Training Shoes – 220,900 – 68,000 = $152,900

Golf Shoes - 120,700 – 32,000 = $88,700

Running Shoes – 138,700 – 29,000 = $109,700

The variable selling and administration costs is determined as follows,

Total selling and admn expenses – fixed admn expenses

Cross training shoes – 175,400 – 51,000 = $124,400

Golf Shoes – 90,500 – 29,600 = $60,900

Running shoes – 114,100 – 29,000 = $85,100

3. The profit impact of eliminating Running Shoes line –

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 prices, volume or costs.