Answered: Fixed costs: Fixed manufacturing costs…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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, 20Y1
	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 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 $756,000.

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.

Feedback

Consider the impact the elimination of the running shoe line would have on the fixed costs.

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
	$Revenues	$Revenues	$Revenues
	Variable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
	$Manufacturing margin	$Manufacturing margin	$Manufacturing margin
	Variable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses
	$Contribution margin	$Contribution margin	$Contribution margin
Fixed costs:
	$Fixed manufacturing costs	$Fixed manufacturing costs	$Fixed manufacturing costs
	Fixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses
Total fixed costs	$fill in the blank 079a5af6bfd9077_29	$fill in the blank 079a5af6bfd9077_30	$fill in the blank 079a5af6bfd9077_31
Operating income (loss)	$fill in the blank 079a5af6bfd9077_32	$fill in the blank 079a5af6bfd9077_33	$fill in the blank 079a5af6bfd9077_34