Question

Variable and Absorption Costing-Three Products 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 $423,300 $241,300 $200,300 Cost of goods sold (220,100) (118,200) (134,200) Gross profit $203,200 $123,100 $66,100 Selling and administrative expenses (174,800) (88.600) (110,400) Operating income $28,400 $34,500 $(44,300) 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 $67,700 $31,400 $20,000 Selling and administrative expenses 50.800 29,000 28,000 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 ineas 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 profits of the company to increase by $44,300.

Answer 1

a. Management decisions and conclusion are incorrect The profit will not be improved because the fixed costs used in manufacturing and selling running shoes will not be avoided if the line eliminated b. Winslow Inc. Variable Costing Income Statements-Three Product Lines For the year ended December 31, 20Y1 Cross Training Golf Shoes Shoes Sales $423,300 $241,300 Variable Cost of Goods sold -$152,400 $86,800 Manufacturing Margin $270,900 $154,500 Variable Selling and administrative expense -$124,000 -$59,600 Contribution Margin $146,900 $94,900 Fixed costs: Fixed manufacturing costs $67,700 -$31,400 Fixed Selling and administrative expense $50,800 -$29,000 Total fixed costs -$118,500 -$60,400 Operating Income (Loss) $28,400 $34,500 Running Shoes $200,300 -$106,200 $94,100 -$82,400 $11,700 -$28,000 -$28,000 -$56,000 $44,300 C. If the running shoe line were eliminated, then the contributing margin of the product line would be eliminated and the fixed cost would not be eliminated. Thus the profit of the company would actually decline by $11,700 Management should keep the line and attempt to improve the profitability of the product by increasing prices, increasing volume or reducing costs Working notes Cross Training Shoes $220,100 $174,800 Golf Shoes $118,2001 $88,600 Cost of Goods sold Selling and administrative expense Running Shoes $134,200 A $110,400 B Fixed Cost Fixed Manufacturing cost Selling and administrative expense $67,700 $50,800 $31,400 $29,000 $28,000C $28,000D Variable Cost Cost of Goods sold Selling and administrative expense $152,400 $124,000 $86,800 $59,600 $106,200 A-C $82,400 B-D