Instructions

Valdespin Company manufactures three sizes of camping tentssmall (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, 2016, is as follows:

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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	Less 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.

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.

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Labels and Amount Descriptions

Labels In CengageNOW, a Label is a text entry that does not have an amount associated with it.
For the Year Ended June 30, 2016
For the Year Ended June 30, 2017
June 30, 2016
June 30, 2017
Amount Descriptions In CengageNOW, an Amount Description is a text entry other than an Account that has an amount associated with it.
Contribution margin
Cost of goods sold
Fixed manufacturing costs
Fixed operating expenses
Gross profit
Income from operations
Manufacturing margin
Sales
Total fixed costs
Variable cost of goods sold
Variable operating expenses

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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.

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Valdespin Company

Variable Costing Income Statement

1		Size S	Size M	Size L	Total
2
3
4
5
6
7	Fixed costs:
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Solution

Valdespin Company

Variable Costing Income Statement

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

Points:

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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.

Points:

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Explanation

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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.

Question not attempted.

Valdespin Company

Projected Variable Costing Income Statement

1		Size S	Size L	Total
2
3
4
5
6
7	Fixed costs:
8
9
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11

Solution

Valdespin Company

Projected Variable Costing Income Statement

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

Points:

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Final Question

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