Winslow Inc. manufactures and sells three types of shoes. The income statements
ID: 2413483 • Letter: W
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 $143,500.
Required:
Winslow Inc.
Product Income Statements—Absorption Costing
For the Year Ended December 31, 20Y1
Explanation / Answer
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
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