Chapter 20, Problem 20.10EX

Variable and absorption costing—three products

Happy Feet Inc. manufactures and sells three types of shoes. The income statements prepared under the-absorption costing method for the three shoes are-as follows:

Happy Feet Inc.

Product Income Statements—Absorption Costing For the Year Ended December 31, 2016

	Cross Training Shoes	Golf Shoes	Running Shoes
Revenues	$800,000	$690,000	$625,000
Cost of goods sold	416,000	338,100	418,750
Gross profit	$384,000	$351,900	$206,250
Selling and administrative expenses	336,000	248,400	350,000
Income from operations	$48,000	$103,500	$(143,750)

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	$128,000	$ 9,700	$ 118,750
Selling and administrative expenses	96,000	82.800	118,750

These fixed costs are used to support all three product lines. In addition, you have determined that the inventory is negligible.

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 $143,750.

1. a. Do you agree with management’s decision and conclusions?
2. b. Prepare a variable costing income statement for the three products.
3. c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes.