Valdespin Company manufactures three sizes of camping tents—small (S), medium (M
ID: 2400333 • Letter: V
Question
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 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:
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?
Size S Size M Size L Total 2 Sales $668,000.00 $737,300.00 956,160.00 $2,361,460.00 3Cost of goods sold $300,000.00 74,880.00 $374,880.00 $293,120.00 $357,120.00 138,250.00 $495,37000 $241,930.00 $437,760.00 $1,094,880.00 172,800.00 $610,560.00 $1,480,810.00 $345,600.00 Variable costs 385,930.00 Fixed costs 6 Total cost of goods sold 7 Gross profit 8 Operating expenses 9Variable expenses 0 Fixed expenses 11 Total operating expenses 12 Income from operations $880,650.00 $132,480.00 92,160.00 $224,640.00 $68,480.00 $155,50000 103,680.00 $259,180.00 $(17,250.00) $195,840.00 115,200.00 $311,040.00 $34,560.00 $483,820.00 311,040.00 $794,860.00 $85,790.00Explanation / Answer
Answer 1. Valedespin Company Variable Costing Income Statement Size S Size M Size L Total Sales 668,000 737,300 956,160 2,361,460 Less: Variable cost Cost of Goods Sold 300,000 357,120 437,760 1,094,880 Operating Expenses 132,480 155,500 195,840 483,820 Total Variable Costs 432,480 512,620 633,600 1,578,700 Contribution 235,520 224,680 322,560 782,760 Less: Fixed Cost Cost of Goods Sold 385,930 Operating Exp. 311,040 Total Fixed Costs 696,970 Net Operating Income 85,790 Answer 2. Change in Net Operating Income If Proposal 2 is Accepted Loss of Contribution - Size M (224,680) Savings of Fixed Cost Cost of Goods Sold 46,080 Operating Exp. 32,240 78,320 Increase (Decrease) in Net Operating Income (146,360) Answer 3 Valedespin Company Variable Costing Income Statement (Prposal 3 is Accepted) Size S Size L Total Sales 1,536,400 956,160 2,492,560 Less: Variable cost Cost of Goods Sold 690,000 437,760 1,127,760 Operating Expenses 304,704 195,840 500,544 Total Variable Costs 994,704 633,600 1,628,304 Contribution 541,696 322,560 864,256 Less: Fixed Cost Cost of Goods Sold 385,930 Operating Exp. 311,040 Rent Exp. - Additional Warehouse 34,560 Total Fixed Costs 731,530 Net Operating Income 132,726 Answer 4. Net Operating Income - Present Level 85,790 Net Operating Income - Proposal 3 is Accepted 132,726 Increase in Net Operating Income 46,936
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