Freebird, Inc., manufactures three sizes of industrial work benches€”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 $190,000 and $37,800, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $113,400 for the salary of an assistant brand manager (classified as a fixed operating expense) 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 January 31, 2013, 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 above, 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 additional expenditure of $113,400 for the assistant brand manager€™s salary 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 Sales $1,320,000 $1,450,000 $1,260,000 $4,030,000 Cost of goods sold: $ 958,000 384,000 $1,342,000 $ 108,000 $ 756,000 334,000 $1,090,000 $ 170,000 $ 718,000 321,300 $1,039,300 $ 280,700 Variable costs $2,432,000 1,039,300 $3,471,300 $ 558,700 Fixed costs Total cost of goods sold Gross profit ... Less operating expenses: Variable expenses Fixed expenses Total operating expenses $ 145,000 $ 113,400 19,000 $ 132,400 $ 37,600 $ 415,900 $ 157,500 118,540 42,840 200,340 $ 80,360 56,700 $ 201,700 $ (93,700) $ 534,440 $ 24,260 Income from operations.. Size Total IS