In: Accounting
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 |
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2 |
Sales |
$668,000.00 |
$737,300.00 |
$956,160.00 |
$2,361,460.00 |
3 |
Cost of goods sold: |
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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: |
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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?
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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 |
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Size S |
Size M |
Size L |
Total |
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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
Variable Costing Income Statement - Proposal 3
Shaded cells have feedback.
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 |
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Size S |
Size L |
Total |
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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
Shaded cells have feedback.
4. By how much would total annual income increase above its present level if Proposal 3 is accepted?
Points:
0 / 1
Feedback
Check My Work
Subtract income computed in Req. 1 from income in Req. 3.