Question

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, 2011 Cross Training Shoes Golf Shoes Running Shoes Revenues $469,100 $276,800 $235,300 Cost of goods sold (243,900) (135,600) (157,700) Gross profit $225,200 $141,200 $77,600 Selling and administrative expenses (193,700) (101,700) (129,600) Operating income $31,500 $39,500 $(52,000) In addition, you have determined the following information with respect to allocated fixed costs: Golf Running Cross Training Shoes Shoes Shoes Fixed costs: Cost of goods sold $75,100 $36,000 $32,900 Selling and administrative expenses 56,300 33,200 32,900 These fixed costs are used to support all three product lines and will not change with the elimination of any one product. In addition, you have determined that the effects of inventory may be ignored 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 shoeline, management expects the

Answer 1

Decision is INCORRECT, The profit wILL NOT improve because FIXED costs will NOT Be avoided
For the Year Ended December 31, 20Y1
	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	469100	276800	235300
Variable cost of goods sold	($168,800)	($99,600)	($124,800)
Manufacturing margin	$300,300	$177,200	$110,500
Variable selling and administrative expenses	-137,400	-68,500	-96,700
Contribution margin	$162,900	$108,700	$13,800
Fixed costs:
Fixed manufacturing costs	$75,100	$36,000	$32,900
Fixed selling and administrative expenses	56,300	33,200	$32,900
Total fixed costs	$131,400	$69,200	$65,800
Income from operations	$31,500	$39,500	($52,000)

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 $13,800

Management should keep the line and attempt to improve the profitability of the product by increasing  prices, increasing  volume, or reducing  costs.