In: Accounting
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?
|
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).