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, 20Y1
	Cross Training Shoes		Golf Shoes		Running Shoes
Revenues	$459,900		$275,900		$234,500
Cost of goods sold	(239,100)		(135,200)		(157,100)
Gross profit	$220,800		$140,700		$77,400
Selling and administrative expenses	(189,900)		(101,300)		(129,300)
Operating income	$30,900		$39,400		$(51,900)

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	$73,600		$35,900		$32,800
Selling and administrative expenses	55,200		33,100		32,800

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 shoe line, management expects the profits of the company to increase by $51,900.

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.

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	$	$	$
Operating income (loss)	$	$	$

c. Use the report in (b) to determine the profit impact of eliminating the running shoe 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

a. Management's decision and conclusion are incorrect. The profit would not be improved because the fixed costs used in manufacturing and selling running shoes would not be avoided if the line is eliminated.

b.

Winslow Inc.
Variable Costing Income Statements - Three Product Lines
For the Year Ended December 31, 20Y1
	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	459900	275900	234500
Variable costs:
Cost of goods sold	165500	99300	124300
Selling and administrative expenses	134700	68200	96500
Total variable costs	300200	167500	220800
Contribution margin	159700	108400	13700
Fixed costs:
Cost of goods sold	73600	35900	32800
Selling and administrative expenses	55200	33100	32800
Total fixed costs	128800	69000	65600
Operating income (loss)	30900	39400	-51900

c. 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 decrease by $13,700. Management should keep the line and attempt to improve the profitability of the product by increasing prices, volume, or reducing costs.