Extreme Camping Company manufactures three sizes of extreme weather 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 $57,600 and $40,300, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $43,200 for the rental of additional warehouse space would yield an increase of 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, 2012, is as follows:

1. Prepare an income statement for the past year in the variable costing format. Use the following headings:

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 €œTotal€ 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.
3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. Use the following headings:

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 €œTotal€ column. For purposes of this problem, the expenditure of $43,200 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? Explain.

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Size Total L. $835,000 $ 921,600 Sales $1,195,200 $2,951,800 Cost of goods sold: Variable costs ... $ 547,200 $1,368,600 $375,000 $ 446,400 93,600 $468,600 $ 619,200 $366,400 $ 302,400 Fixed costs 172,800 216,000 482,400 $ 763,200 $ 432,000 Total cost of goods sold Gross profit ... Less operating expenses: Variable expenses Fixed expenses Total operating expenses Income from operations. $1,851,000 $1,100,800 $ 604,800 388,800 $ 993,600 $ 107,200 $ 244,800 144,000 $ 388,800 $ 43,200 $165,600 $ 194,400 115,200 $280,800 $ 85,600 129,600 $ 324,000 $ (21,600) Size Total