Winslow Inc manufactures and sells three types of shoes The

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 $143,500.

Required:

Winslow Inc.

Product Income Statements—Absorption Costing

For the Year Ended December 31, 20Y1

Solution

Part a:

Under current production level:

Cross training shoes

Golf shoes

Running shoes

Total

(A): Revenues

850000

700000

635000

2185000

Variable cost of goods sold

284500

248400

298500

831400

Variable selling and administrative costs

293100

175500

216000

684600

(B): Total variable costs

577600

423900

514500

1516000

Profit (A-B)

272400

276100

120500

669000

Less: Total fixed costs

661100

Net profit at present

7900

Cross training shoes

Golf shoes

Total

(A): Revenues

   850,000.00

   700,000.00

   1,550,000.00

Variable cost of goods sold

   284,500.00

   248,400.00

       532,900.00

Variable selling and administrative costs

   293,100.00

   175,500.00

       468,600.00

(B): Total variable costs

   577,600.00

   423,900.00

   1,001,500.00

Profit (A-B)

   272,400.00

   276,100.00

       548,500.00

Less: Total fixed costs

       661,100.00

Net profit / (loss) at present

    (112,600.00)

Decision and conclusion:

No, it is clear that the conclusion and decision of the management that dropping Running shoes from production line would increase the net profit of the company by $143,500 is absolutely baseless and incorrect. As can be seen in the above that the decision of dropping of running shoes in fact would resulted in overall loss of $112,600 to the company.

Workings:

Variable costs:

Cross training shoes

Golf shoes

Running shoes

Total fixed costs:

Cost of goods sold

413000

338700

419000

Less: Fixed element

128500

90300

120500

339300

Variable cost of goods sold

284500

248400

298500

Selling and administrative expenses

389000

257900

359500

Less: Fixed element

95900

82400

143500

321800

Variable selling and administrative costs

293100

175500

216000

Total fixed costs:

Fixed cost of goods sold

339300

Fixed costs of selling and administrative expenses

321800

Total fixed costs:

661100

Part b:

Part (b):

All amounts are in $

Cross training shoes

Golf shoes

Running shoes

(A): Revenues

850000

700000

635000

Variable cost of goods sold

284500

248400

298500

Variable selling and administrative costs

293100

175500

216000

(B): Total variable costs

577600

423900

514500

Profit (A-B)

272400

276100

120500

Workings:

Variable costs:

Cross training shoes

Golf shoes

Running shoes

Cost of goods sold

413000

338700

419000

Less: Fixed element

128500

90300

120500

Variable cost of goods sold

284500

248400

298500

Selling and administrative expenses

389000

257900

359500

Less: Fixed element

95900

82400

143500

Variable selling and administrative costs

293100

175500

216000

Part c:

Impact on profit:

Profit with Running shoes along with other two types of shoes

7900

Profit after dropping the running shoes

(112,600.00)

Impact on profit

    (120,500.00)

Thus, the profit of the company would reduce by $120,500 as can be seen in the above table.

	Cross training shoes	Golf shoes	Running shoes	Total
(A): Revenues	850000	700000	635000	2185000
Variable cost of goods sold	284500	248400	298500	831400
Variable selling and administrative costs	293100	175500	216000	684600
(B): Total variable costs	577600	423900	514500	1516000
Profit (A-B)	272400	276100	120500	669000
Less: Total fixed costs		661100
Net profit at present		7900