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 expenses 389,000.00 257,900.00 359,500.00
6. Income (Loss) from operations $48,000.00 $103,400.00 ($143,500.00)

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 $54,200.


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

Winslow Inc.

a. I do not agree with management's decision and conclusions. Before the elimination of the Running Shoes Department, the company recorded a total net profit of $7,900. After the elimination, the company recorded a total net loss of $112,600.

b. Variable Costing Income Statement for the three products:

Winslow Inc. Product Income Statements—Variable Costing For the Year Ended December 31, 20Y1

1 Cross Training Golf Shoes Running

Shoes Shoes

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

3. Variable Costs:

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

Selling & admin. expenses 293,100 175,500 216,000

Total variable costs 577,600 423,900 514,500

4. Contribution margin $272,400 $276,100 $120,500

5. Fixed Costs:

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

Selling and admin. exp. 95,900 82,400 143,500

Total fixed costs 224,400 172,700 264,000

6. Income (Loss) from

operations $48,000 $103,400 ($143,500) $7,900

c. The impact of eliminating the running shoe line is the increase of the net operating loss from a net profit of $7,900 to $112, 600.

Step-by-step 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 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 expenses 389,000.00 257,900.00 359,500.00

6. Income (Loss) from

operations $48,000.00 $103,400.00 ($143,500.00)

1 Cross Training Golf Shoes Running

Shoes Shoes

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

3. Cost of goods sold

Variable cost 284,500 248,400 298,500

Fixed cost 128,500 90,300 120,500

Total cost of goods sold 413,000 338,700 419,000

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

5. Selling and

administrative expenses

Variable cost 293,100 175,500 216,000

Fixed cost 95,900 82,400 143,500

Total selling & admin. 389,000 257,900 359,500

6. Income (Loss) from

operations $48,000 $103,400 ($143,500) $7,900

Elimination of the Running Shoes Department:

1 Cross Training Golf Shoes Total

Shoes

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

3. Cost of goods sold

Variable cost 284,500 248,400 532,900

Fixed cost 128,500 90,300 339,300

Total cost of goods sold 413,000 338,700 872,200

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

5. Selling and

administrative expenses

Variable cost 293,100 175,500 468,600

Fixed cost 95,900 82,400 321,800

Total selling & admin. 389,000 257,900 790,400

6. Income (Loss) from

operations $48,000 $103,400 ($112,600)