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, 20Y9, is as follows: 1 Size S Size M Size L Total 2 Sales $668,000.00 $737,300.00 $956,160.00 $2,361,460.00 5 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 prot $293,120.00 $241,930.00 $345,600.00 $880,650.00 3 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