Variable and Absorption Costing—Three Products
Winslow Inc. manufactures and sells three types of shoes. Theincome statements prepared under the absorption costing method forthe 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 | $396,100 | | $229,700 | | $199,800 | |
| Cost of goods sold | 206,000 | | 112,600 | | 133,900 | |
| Gross profit | $190,100 | | $117,100 | | $65,900 | |
| Selling and administrative expenses | 163,500 | | 84,300 | | 110,100 | |
| Income (loss) from operations | $26,600 | | $32,800 | | $(44,200) | |
In addition, you have determined the following information withrespect to allocated fixed costs:
| Cross Training Shoes | Golf Shoes | Running Shoes |
| Fixed costs: | | | |
| Cost of goods sold | $63,400 | | $29,900 | | $28,000 | |
| Selling and administrative expenses | 47,500 | | 27,600 | | 28,000 | |
These fixed costs are used to support all three product lines.In addition, you have determined that the inventory isnegligible.
The management of the company has deemed the profit performanceof the running shoe line as unacceptable. As a result, it hasdecided to eliminate the running shoe line. Management does notexpect 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$44,200.
a. Are management’s decision and conclusionscorrect?
Management’s decision and conclusion are incorrect . The profitwill not be improved because the fixed costs used inmanufacturing and selling running shoes will not beavoided if the line is eliminated.
Feedback
Correct
b. Prepare a variable costing income statementfor the three products. Enter a net loss as a negative number usinga minus sign; enter all other amounts as positive numbers.
| Winslow Inc. |
| Variable Costing Income Statements—Three ProductLines |
| 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
c. Use the report in (b) to determine theprofit impact of eliminating the running shoes line, assuming noother changes.
If the running shoes line were eliminated, then the contributionmargin of the product line would be eliminated and thefixed costs would not be eliminated. Thus, the profit ofthe company would actually decline by __________$.Management should keep the line and attempt to improve theprofitability of the product by increasing prices,increasing volume, or reducing costs.
I tried $56,000 and it did not work, please help. I only need toblank answer for the third part of the problem
