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. 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 Feedback When recasting the variable costing income statement, remember that under variable costing, all fixed factory overhead costs are deducted in the period incurred. Revenues - Variable Cost of Goods Sold = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative Expenses = Contribution Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Operating income c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes. If the running shoe line were eliminated, then the contribution margin of the product line would and the fixed costs
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
b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign.
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 |
When recasting the variable costing income statement, remember that under variable costing, all fixed
c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes.
If the running shoe line were eliminated, then the contribution margin of the product line would
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