Question

Happy Feet Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows:

Happy Feet Inc. Product Income Statements -- Absorption Costing

For the Year Ended December 31, 2016

1		Cross Training Shoes	Golf Shoes	Running Shoes
2	Revenues	$830,000.00	$720,000.00	$640,000.00
3	Cost of goods sold	418,000.00	339,800.00	417,000.00
4	Gross profit	$412,000.00	$380,200.00	$223,000.00
5	Selling and administrative expenses	363,800.00	277,200.00	366,400.00
6	Income (Loss) from operations	$48,200.00	$103,000.00	$(143,400.00)

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	$127,000.00	$89,900.00	$118,750.00
4	Selling and administrative expenses	94,700.00	82,800.00	117,500.00

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 $142,500. Required:

A. Do you agree with management's decision and conclusions?

Answer 1

No, I do not agree with the management’s decisions and conclusions.

Since the fixed costs are unavoidable, they will not reduce on discontinuing a shoe

Results will be as follows:

	Running Shoes
Revenues	$640,000
Avoidable Cost of Goods Sold	298,250
Gross profit	341,750
Avoidable Selling and Administrative Expenses	248,900
Income (Loss) from operations	92,850

Discontinuing the product line will lead to a reduction in profits by $92,850