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
1 Cross Training Shoes Golf Shoes Running Shoes
2 Revenues $850,000.00 $700,000.00 $635,000.00
3 Cost of goods sold 413,000.00 338,700.00 419,000.00
4 Gross profit $437,000.00 $361,300.00 $216,000.00
5 Selling and administrative 389,000.00 257,900.00 359,500.00
expenses
6 Income (Loss) from $48,000.00 $103,400.00 $(143,500.00)
operations
In addition, you have determined the following information with respect to allocated fixed costs:
1 Cross Training Shoes Golf Shoes Running Shoes
2 Fixed costs:
3 Cost of goods sold $128,500.00 $90,300.00 $120,500.00
4 Selling and administrative expenses
95,900.00 82,400.00 143,500.00
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 $143,500.
Required:
a. Do you agree with management’s decision and conclusions? Explain your answer. (Note: You may wish to complete part (b), the variable costing income statement, first.)
b. Prepare a variable costing income statement for the three products. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. Enter all other amounts as positive numbers.
c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes. Use the minus sign to indicate a decline in profit.

Answer 1

Answer:

Winslow Inc.

a. No. I do not agree with management's decision and conclusions.  Eliminating the running shoes line increased the company-wide loss to $112,600 from a profit of $7,900.

b. Variable Costing Income Statements:

1                                   Cross Training  Golf Shoes  Running Shoes  Total

2 Revenues                      $850,000     $700,000    $635,000  $2,185,000

3 Variable costs:

Cost of goods sold             284,500       248,400      298,500       831,400

Selling and administrative  293,100        175,500       216,000      684,600                      

Total                                    577,600       423,900       514,500    1,516,000

4 Gross profit                   $272,400     $276,100     $120,500   $669,000

5 Fixed costs:

Cost of goods sold             128,500         90,300       120,500      339,300

Selling & administrative      95,900          82,400       143,500       321,800

Total                                   224,400        172,700      264,000        661,100

6 Income (Loss) from       $48,000      $103,400    $(143,500)       $7,900

c. Eliminating the line only eliminated the variable costs of goods sold and selling and administrative expenses.  The fixed costs were not changed with the elimination.  Therefore, eliminating the running shoes line increased the company-wide loss to $112,600 from a profit of $7,900.

Explanation:

a) Data and Calculations:

Winslow Inc.

Product Income Statements—Absorption Costing

For the Year Ended December 31, 20Y1

1                                   Cross Training  Golf Shoes  Running Shoes  Total

2 Revenues                      $850,000     $700,000      $635,000

3 Cost of goods sold           413,000       338,700         419,000

4 Gross profit                    $437,000     $361,300       $216,000

5 Selling & administrative

 expenses                         389,000       257,900         359,500

6 Income (Loss) from        $48,000      $103,400      $(143,500)

1                                   Cross Training  Golf Shoes  Running Shoes  Total

2 Revenues                      $850,000     $700,000    $635,000  $2,185,000

3 Variable costs:

Cost of goods sold             284,500       248,400      298,500       831,400

Selling and administrative  293,100        175,500       216,000      684,600                      

Total                                    577,600       423,900       514,500    1,516,000

4 Gross profit                   $272,400     $276,100     $120,500   $669,000

5 Fixed costs:

Cost of goods sold             128,500         90,300       120,500      339,300

Selling & administrative      95,900          82,400       143,500       321,800

Total                                   224,400        172,700      264,000        661,100

6 Income (Loss) from       $48,000      $103,400    $(143,500)       $7,900

Eliminating the running shoe line:

1                                   Cross Training  Golf Shoes          Total

2 Revenues                      $850,000     $700,000      $1,550,000

3 Cost of goods sold:

Variable costs                     284,500       248,400          532,900

Fixed costs                          128,500         90,300           339,300

Total                                     413,000       338,700           872,200

4 Gross profit                   $437,000      $361,300        $677,800

5 Selling & administrative  expenses:

Variable costs                    293,100         175,500         468,600

Fixed costs                          95,900          82,400          321,800

Total                                  389,000        257,900         790,400

6 Income (Loss) from       $48,000      $103,400       ($112,600)