Question

Variable and Absorption Costing-Three Products Winslow Inc. manufactures and sells three types of shoes. The income statements prepared undert Winslow Inc. Product Income Statements-Absorption Costing For the Year Ended December 31, 2011 Cross Training Shoes Golf Shoes Running Shoes Revenues $5,800,000 $6,900,000 $4,200,000 Cost of goods sold (3,016,000) (3,381,000) (2,814,000) Gross profit $2,784,000 $3,519,000 $1,386,000 Selling and administrative expenses (2,436,000) (2,484,000) (2,142,000) Operating income $348,000 $1,035,000 $(756,000) 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 $928,000 $897,000 $798,000 Selling and administrative expenses 696,000 828,000 588,000 These fixed costs are used to support all three product lines and will not change with the elimination of any on inventory may be ignored. The management of the company has deemed the profit performance of the running shoe line as unacceptable. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminat company to increase by $756,000.

Answer 1

Answer is given below

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 Running Shoes Winslow Inc. Variable Costing Income Statements-Three Product Lines For the year ended December 31, 20Y1 Cross Golf Training Shoes Shoes Sales $5,800,000 $6,900,000 Less: Variable Cost of Goods sold $2,088,000 $2,484,000 Manufacturing Margin $3,712,000 $4,416,000 Variable Selling and administrative expense $1,740,000 $1,656,000 Contribution Margin $1,972,000 $2,760,000 Less: fixed cost Fixed manufacturing costs $928,000 $897,000 Fixed Selling and administrative expense $696,000 $828,000 Total fixed cost $1,624,000 $1,725,000 Operating Income (Loss) $348,000 $1,035,000 $4,200,000 $2,016,000 $2,184,000 $1,554,000 $630,000 $798,000 $588,000 $1,386,000 $756,000 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 $630,000 Management should keep the line and attempt to improve the profitability of the product by increasing sales increasing volume or reducing costs Working notes Cross Training Shoes $3,016,000 $2,436,000 Golf Shoes $3,381,000 $2,484,000 Running Shoes $2,814,000 A $2,142,000 B Cost of Goods sold Selling and administrative expense Fixed Cost Fixed Manufacturing cost Selling and administrative expense $928,000 $696,000 $897,000 $828,000 $798,000 C $588,000 D Variable Cost Cost of Goods sold Selling and administrative expense $2,088,000 $1,740,000 $2,484,000 $1,656,000 $2,016,000 A-C $1,554,000 B-D