Valdespin Company manufactures three sizes
Valdespin 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 isconsidering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total outputaccordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of SizeS 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 fixedproduction 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 therental of additional warehouse space would yield an additional 130% in Size S sales volume. It is alsoassumed that the increased production of Size S would utilize the plant facilities released by thediscontinuance of Size M.The sales and costs have been relatively stable over the past few years, and they are expected toremain so for the foreseeable future. The income statement for the past year ended June 30, 2016, isas follows:Size S12 Sales3Total cost ofgoods sold7 Gross profit912$668,000.00$737,300.00$956,160.00$2,361,460.00$300,000.00$357,120.00$437,760.00$1,094,880.0074,880.00138,250.00172,800.00385,930.00$374,880.00$495,370.00$610,560.00$1,480,810.00$293,120.00$241,930.00$345,600.00$880,650.00$132,480.00$155,500.00$195,840.00$483,820.0092,160.00103,680.00115,200.00311,040.00$224,640.00$259,180.00$311,040.00$794,860.00$68,480.00$(17,250.00)$34,560.00$85,790.00Less operatingexpenses:Variableexpenses10 Fixed expenses11Totalsold:5 Fixed costs8Size LCost of goods4 Variable costs6Size MTotal operatingexpensesIncome fromoperationsRequired:1. Prepare an income statement for the past year in the variable costing format. Data for each styleshould be reported through contribution margin. The fixed costs should be deducted from the totalcontribution 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 theamount by which total annual income from operations would be reduced below its present level ifSize S1Size MSize LTotalProposal 2 is accepted.3. Prepare an income statement in the variable costing format, indicating the projected annualincome from operations if Proposal 3 is accepted. Data for each style should be reported throughcontribution margin. The fixed costs should be deducted from the total contribution margin asreported in the “Total†column. For purposes of this problem, the expenditure of $34,560 for therental 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 answerchoices for text entries. Be sure to complete the statement heading. A colon (:) willautomatically appear if it is required. Enter all amounts as positive numbers.1. Prepare an income statement for the past year in the variable costing format. Data for each styleshould be reported through contribution margin. The fixed costs should be deducted from the totalcontribution margin, as reported in the “Total†column, to determine income from operations. Refer tothe lists of Labels and Amount Descriptions for the exact wording of the answer choices for textentries. Be sure to complete the statement heading. A colon (:) will automatically appear if it isrequired. Enter all amounts as positive numbers.Valdespin CompanyVariable Costing Income Statement1234567 Fixed costs:891011Size SSize MSize LTotal
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