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

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.

Valdespin Company

Variable Costing Income Statement

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

Additional Question - Proposal 2

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.

Variable Costing Income Statement - Proposal 3

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.

Valdespin Company

Variable Costing Income Statement

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

Final Question

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

Answer 1

1) Valdespin Company

Variable Costing Income Statement

for the year ended June 30, 20Y9 (Amounts in $)

Particulars	Size S	Size M	Size L	Total
Sales	668,000	737,300	956,160	2,361,460
Less: Variable cost of goods sold	(300,000)	(357,120)	(437,760)	(1,094,880)
Less: Variable operating expenses	(132,480)	(155,500)	(195,840)	(483,820)
Contribution Margin	235,520	224,680	322,560	782,760
Less: Fixed Costs
Cost of goods sold	(74,880)	(138,250)	(172,800)	(385,930)
Operating Expenses	(92,160)	(103,680)	(115,200)	(311,040)
Income(Loss) from Operations	68,480	(17,250)	34,560	85,790

2) If proposal 2 is accepted then there will be a loss of contribution margin of $224,680 from size M and total decrease in the annual fixed production costs and fixed operating expenses will be $46,080 and $32,240 respectively.  

Net decrease in income from operations = Loss from Contribution - Decrease in Fixed costs

= $224,680 - $46,080 - $32,240 = $146,360   

Present Income from operations = $85,790

Income from operations after proposal 2 is accepted = $85,790 - $146,360 = -$60,570

3) Total Production volume after increase = 100% earlier+130% increase = 230%

New Sales for Size S = 668,000*230% = $1,536,400

New Variable COGS for Size S = 300,000*230% = $690,000

Varibale Operating Expenses will remain same. As the release production capacity will be utilized by Size S, Fixed COGS of Size M will be included in Fixed COGS of Size S.

New Fixed COGS of Size S = $74,880+($138,250-46,080) = $167,050

New Fixed Operating Expenses = $92,160+$34,560+($103,680-$32,240) = $198,160

Variable costing Income Statement if Proposal 3 is accepted

Valdespin Company

Variable Costing Income Statement (Amounts in $)

Particulars	Size S	Size L	Total
Sales	1,536,400	956,160	2,492,560
Less: Variable cost of goods sold	(690,000)	(437,760)	(1,127,760)
Less: Variable operating expenses	(132,480)	(195,840)	(328,320)
Contribution Margin	713,920	322,560	1,036,480
Less: Fixed Costs
Cost of goods sold	(167,050)	(172,800)	(339,850)
Operating Expenses	(198,160)	(115,200)	(313,360)
Income(Loss) from Operations	348,710	34,560	383,270

4) Total Increase in income = $383,270 - $85,790 = $297,480