Question

In: Accounting

Segment variable costing income statement and effect on income of change in operations Instructions Labels and...

Segment variable costing income statement and effect on income of change in operations

Instructions

Labels and Amount Descriptions

Variable Costing Income Statement - Proposal 1

Additional Question - Proposal 2

Variable Costing Income Statement - Proposal 3

Final Question

X

Instructions

Valdespin Company manufactures three sizes of camping tents—small (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used.

If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by $46,080 and $32,240, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $34,560 for the rental of additional warehouse space would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M.

The sales and costs have been relatively stable over the past few years, and they are expected to remain so for the foreseeable future. The income statement for the past year ended June 30, 20Y9, is as follows:

1

Size S

Size M

Size L

Total

2

Sales

$668,000.00

$737,300.00

$956,160.00

$2,361,460.00

3

Cost of goods sold:

4

Variable costs

$300,000.00

$357,120.00

$437,760.00

$1,094,880.00

5

Fixed costs

74,880.00

138,250.00

172,800.00

385,930.00

6

Total cost of goods sold

$374,880.00

$495,370.00

$610,560.00

$1,480,810.00

7

Gross profit

$293,120.00

$241,930.00

$345,600.00

$880,650.00

8

Operating expenses:

9

Variable expenses

$132,480.00

$155,500.00

$195,840.00

$483,820.00

10

Fixed expenses

92,160.00

103,680.00

115,200.00

311,040.00

11

Total operating expenses

$224,640.00

$259,180.00

$311,040.00

$794,860.00

12

Income from operations

$68,480.00

$(17,250.00)

$34,560.00

$85,790.00

Required:
1. Prepare an income statement for the past year in the variable costing format. Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin, as reported in the “Total” column, to determine income from operations.*
2. Based on the income statement prepared in (1) and the other data presented, determine the amount by which total annual income from operations would be reduced below its present level if Proposal 2 is accepted. If a loss is incurred, enter that amount as a negative number using a minus sign.
3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin as reported in the “Total” column. For purposes of this problem, the expenditure of $34,560 for the rental of additional warehouse space can be added to the fixed operating expenses.*
4. By how much would total annual income increase above its present level if Proposal 3 is accepted?
* Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. Enter all amounts as positive numbers.

Solutions

Expert Solution

1.

VALDESPIN COMPANY
Variable costing Income Statement
Size S Size M Size L Total
Sales 668000 737300 956160 2361460
Variable Expenses
   Cost of Goods Sold 300000 357120 437760 1094880
   Operating Expenses 132480 155500 195840 483820
Total variable Expenses 432480 512620 633600 1578700
Contribution Margin 235520 224680 322560 782760
Fixed Expenses
   Cost of Goods Sold 385930
   Operating Expenses 311040
Total Fixed Expenses 696970
Income from operations 85790

2.

Variable costing Income Statement - Proposal 2
(Discontinue Size M)
Size S Size L Total
Sales 668000 956160 1624160
Variable Expenses
   Cost of Goods Sold 300000 437760 737760
   Operating Expenses 132480 195840 328320
Total variable Expenses 432480 633600 1066080
Contribution Margin 235520 322560 558080
Fixed Expenses
   Cost of Goods Sold 339850
   Operating Expenses 278800
Total Fixed Expenses 618650
Income from operations -60570
Size M was contributing $224,680 towards fixed costs.
    After closing, we are saving only $78,320($46,080 + $32,240)
    thereby by losing $146,360 profits which will result in loss.

3.

Variable costing Income Statement - Proposal 3
Size S Size L Total
Sales 1536400 956160 2492560
Variable Expenses
   Cost of Goods Sold 689997 437760 1127757
   Operating Expenses 304668 195840 500508
Total variable Expenses 994665 633600 1628265
Contribution Margin 541735 322560 864295
Fixed Expenses
   Cost of Goods Sold 385930
   Operating Expenses 345600
Total Fixed Expenses 731530
Income from operations 132765
Since the increased sales of size L will utilise , the facilities of
size M, there will not be any savings in fixed expeses.
Variable Cost of goods sold is 44.91% of sales for Size S
Variable operating expenses is 19.83% of sales for Size S
Revised sales for Size S = 668,000 + 130% of 668,000 = 1,536,400

4.

If the Proposal (3) is accepted, the net profit will increase by $46,975. ($132,765 - $85,790).


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