Question

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.

Labels and Amount Descriptions

Labels
For the Year Ended June 30, 20Y9
Fixed costs
June 30, 20Y9
Amount Descriptions
Contribution margin
Cost of goods sold
Manufacturing costs
Operating expenses
Gross profit
Income from operations
Manufacturing margin
Sales
Total fixed costs
Variable cost of goods sold
Variable operating expenses

Variable Costing Income Statement - Proposal 1

Shaded cells have feedback.

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. 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.

Score: 144/144

Valdespin Company

Variable Costing Income Statement

✔

1		Size S	Size M	Size L	Total
2	✔	✔	✔	✔	✔
3	✔	✔	✔	✔	✔
4	✔	✔	✔	✔	✔
5	✔	✔	✔	✔	✔
6	✔	✔	✔	✔	✔
7	✔
8	✔				✔
9	✔				✔
10	✔				✔
11	✔				✔

Points:

35 / 35

Feedback

Check My Work

For each size and in total compute the following:

Sales - variable cost of goods sold = manufacturing margin; Manufacturing margin - variable operating expenses = contribution margin; at this point subtract fixed manufacturing costs and operating expenses from the total contribution margin to obtain the total Income from operations.

Additional Question - Proposal 2

Shaded cells have feedback.

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.

Points:

0 / 1

Feedback

Check My Work

Contribution margin for Size M - reduction in fixed production costs - reduction in fixed operating expenses = reduction in annual income from operations

Variable Costing Income Statement - Proposal 3

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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. 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.

Score: 124/124

Valdespin Company

Variable Costing Income Statement

✔

1		Size S	Size L	Total
2	✔	✔	✔	✔
3	✔	✔	✔	✔
4	✔	✔	✔	✔
5	✔	✔	✔	✔
6	✔	✔	✔	✔
7	✔
8	✔			✔
9	✔			✔
10	✔			✔
11	✔			✔

Points:

30 / 30

Feedback

Check My Work

Recast the income statement using the same format as in requirement (1) with only S and L sizes.

After computing contribution margin for S, L, and total, subtract fixed manufacturing costs and operating expenses from the total contribution margin to obtain the total income from operations.

Final Question

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4. By how much would total annual income increase above its present level if Proposal 3 is accepted?

Points:

1 / 1

Feedback

Check My Work

Subtract income computed in Req. 1 from income in Req. 3.

Answer 1

• All working forms part of the answer
• Amounts are in $
• Requirement 1: Contribution margin income statement (Proposal 1: Continue with Size M)

	Size S ($)	Size M ($)	Size L ($)	Total ($)
Sales	668000	737300	956160	2361460
(-) variable cost of goods sold	300000	357120	437760	1094880
Manufacturing margin	368000	380180	518400	1266580
(-) variable operating expense	132480	155500	195840	483820
Contribution margin	235520	224680	322560	782760
(-) Fixed Cost
Fixed cost of goods sold	74880	138250	172800	385930
Fixed operating expense	92160	103680	115200	311040
Total Fixed cost	167040	241930	288000	696970
Net Income	$68480	$-17250	$34560	$85790

• Requirement 2: If Proposal 2 is accepted

	Size S ($)	Size M ($)	Size L ($)	Total ($)
Sales	668000	0	956160	2361460
(-) variable cost of goods sold	300000	0	437760	1094880
Manufacturing margin	368000	0	518400	886400
(-) variable operating expense	132480	0	195840	483820
Contribution margin	235520	0	322560	558080
(-) Fixed Cost
Fixed cost of goods sold	74880	92170	172800	385930
Fixed operating expense	92160	71440	115200	311040
Total Fixed cost	167040	163610	288000	618650
Net Income	$68480	-163610	34560	$-60570
Current Income from Operation	68480	-17250	34560	85790
Increase (Decrease) in Income	0	$-146360	0	$-146360

• Requirement 3: If Proposal 3 is accepted

Working

Size ‘S’ contribution margin ratio = 235520 / 668000 = 35.257…..%
New Size ‘S’ sale = 668000 + 130% = $1,536,400
New Size ‘S’ contribution margin = 1536400 x 35.257….% = $541,696

	Size S ($)	Size M ($)	Size L ($)	Total ($)
Sales	1536400	0	956160	2361460
(-) variable cost of goods sold	690000	0	437760	1094880
Manufacturing margin	846400	0	518400	1364800
(-) variable operating expense	304704	0	195840	483820
Contribution margin	541696	0	322560	864256
(-) Fixed Cost
Fixed cost of goods sold	74880	138250	172800	385930
Fixed operating expense	126720	103680	115200	311040
Total Fixed cost	201600	241930	288000	731530
Net Income	340096	-241930	34560	132726
Current Income from Operation	68480	-17250	34560	85790
Increase (Decrease) in Income	271616	-224680	0	46936

Proof that Net Income would increase by $46,936---

	S	L	Total
Contribution Margin	541696	322560	$864256
(-) Existing fixed cost			$696970
(-) Additional fixed cost			$34560
Net operating income			$132726
Existing operating income			85790
Increase in Income			46936