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	$360,800		$212,900		$181,000
Cost of goods sold	187,600		104,300		121,300
Gross profit	$173,200		$108,600		$59,700
Selling and administrative expenses	149,000		78,200		99,700
Income (loss) from operations	$24,200		$30,400		$(40,000)

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	$57,700		$27,700		$25,300
Selling and administrative expenses	43,300		25,500		25,300

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$40,000.

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.

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	$	$	$

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 $. Managementshould keep the line and attempt to improve the profitability ofthe product by increasing  prices,increasing  volume, or reducing  costs.