PR $20-5$A Segment variable

costing income statement and effect on income of change in

operationsValdespin 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 vwould

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:$$

$$

Size$$

$$

S$$

$$

$$M$$

$$L$$

$$ Total

Sales....$$

$$

$$668,000$

$$737,300$

$$$$956,160$

$$2,361,460$Cost of goods:$$ Variable costs.........

$$

$$300,000$

$$357,120$

$$437,760$

$$1,094,880$ Fixed

costs............$$

$$

$74,880$

$$

$138,250$

$172,800$

$$

$385,930$ Total cost of

goods sold.... $$374,880$

$$

$$495,370$

$$610,560$

$$1,480,810$ Gross

profit................$$

$$293,120$

$$

$$241,930$

$$345,600$

$$880,650$Less operating expenses:$$ Variable

expenses....$$

$$132,480$

$$155,500$

$$195,840$

$$483,820$ Fixed

expenses.....$$

$92,160$

$$

$103,680$

$$

$115,200$

$311,040$Total operating

expenses....$$

$$224,640$

$$259,180$

$$311,040$

$$794,860$InstructionsPrepare an income statement for the past year in the variable

costing format. Use the following headings:$$

$$

Size$$

S$$

$$

M$$

L$$ Total$$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$,$ to

determine income from operations.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.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:$$

$$

Size$$

S$$

L$$ Total$$Data 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 the

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 the total annual income increase above its

present level if Proposal $3$ is accepted? Explain