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:

Instructions

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

headings:

Data for each size 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

operating income.

Based on the income statement prepared in $(1)$ and the other data presented, determine the

amount by which total annual operating income would be reduced below its present level if

Proposal $2$ is accepted.

Prepare an income statement in the variable costing format, indicating the projected annual

operating income if Proposal $3$ is accepted. Use the following headings:

$\frac{\text{S}\text{i}\text{z}\text{e}}{S},$ Total

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.

By how much would total annual operating income increase above its present level if

Proposal $3$ is accepted? Explain.