Valdespin Company manufactures three sizes of camping tents—small (S), medium (M
ID: 2544754 • 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:
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
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
Labels and Amount Descriptions
Variable Costing Income Statement - Proposal 1
Shaded cells have feedback.
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.
Score: 144/144
Valdespin Company
Variable Costing Income Statement
1
Size S
Size M
Size L
Total
2
3
4
5
6
7
8
9
10
11
Points:
35 / 35
Feedback
Check My Work
For each size and in total compute the following:
Sales - variable cost of goods sold = manufacturing margin; Manufacturing margin - variable operating expenses = contribution margin; at this point subtract fixed manufacturing costs and operating expenses from the total contribution margin to obtain the total Income from operations.
Additional Question - Proposal 2
Shaded cells have feedback.
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. If a loss is incurred, enter that amount as a negative number using a minus sign.
Points:
0 / 1
Feedback
Check My Work
Contribution margin for Size M - reduction in fixed production costs - reduction in fixed operating expenses = reduction in annual income from operations
Variable Costing Income Statement - Proposal 3
Shaded cells have feedback.
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.
Score: 124/124
Valdespin Company
Variable Costing Income Statement
1
Size S
Size L
Total
2
3
4
5
6
7
8
9
10
11
Points:
30 / 30
Feedback
Check My Work
Recast the income statement using the same format as in requirement (1) with only S and L sizes.
After computing contribution margin for S, L, and total, subtract fixed manufacturing costs and operating expenses from the total contribution margin to obtain the total income from operations.
Final Question
Shaded cells have feedback.
4. By how much would total annual income increase above its present level if Proposal 3 is accepted?
Points:
1 / 1
Feedback
Check My Work
Subtract income computed in Req. 1 from income in Req. 3.
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
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
$85,790.00
Explanation / Answer
Answer
Size S ($)
Size M ($)
Size L ($)
Total ($)
Sales
668000
737300
956160
2361460
(-) variable cost of goods sold
300000
357120
437760
1094880
Manufacturing margin
368000
380180
518400
1266580
(-) variable operating expense
132480
155500
195840
483820
Contribution margin
235520
224680
322560
782760
(-) Fixed Cost
Fixed cost of goods sold
74880
138250
172800
385930
Fixed operating expense
92160
103680
115200
311040
Total Fixed cost
167040
241930
288000
696970
Net Income
$68480
$-17250
$34560
$85790
Size S ($)
Size M ($)
Size L ($)
Total ($)
Sales
668000
0
956160
2361460
(-) variable cost of goods sold
300000
0
437760
1094880
Manufacturing margin
368000
0
518400
886400
(-) variable operating expense
132480
0
195840
483820
Contribution margin
235520
0
322560
558080
(-) Fixed Cost
Fixed cost of goods sold
74880
92170
172800
385930
Fixed operating expense
92160
71440
115200
311040
Total Fixed cost
167040
163610
288000
618650
Net Income
$68480
-163610
34560
$-60570
Current Income from Operation
68480
-17250
34560
85790
Increase (Decrease) in Income
0
$-146360
0
$-146360
Working
Size ‘S’ contribution margin ratio = 235520 / 668000 = 35.257…..%
New Size ‘S’ sale = 668000 + 130% = $1,536,400
New Size ‘S’ contribution margin = 1536400 x 35.257….% = $541,696
Size S ($)
Size M ($)
Size L ($)
Total ($)
Sales
1536400
0
956160
2361460
(-) variable cost of goods sold
690000
0
437760
1094880
Manufacturing margin
846400
0
518400
1364800
(-) variable operating expense
304704
0
195840
483820
Contribution margin
541696
0
322560
864256
(-) Fixed Cost
Fixed cost of goods sold
74880
138250
172800
385930
Fixed operating expense
126720
103680
115200
311040
Total Fixed cost
201600
241930
288000
731530
Net Income
340096
-241930
34560
132726
Current Income from Operation
68480
-17250
34560
85790
Increase (Decrease) in Income
271616
-224680
0
46936
Proof that Net Income would increase by $46,936---
S
L
Total
Contribution Margin
541696
322560
$864256
(-) Existing fixed cost
$696970
(-) Additional fixed cost
$34560
Net operating income
$132726
Existing operating income
85790
Increase in Income
46936
Size S ($)
Size M ($)
Size L ($)
Total ($)
Sales
668000
737300
956160
2361460
(-) variable cost of goods sold
300000
357120
437760
1094880
Manufacturing margin
368000
380180
518400
1266580
(-) variable operating expense
132480
155500
195840
483820
Contribution margin
235520
224680
322560
782760
(-) Fixed Cost
Fixed cost of goods sold
74880
138250
172800
385930
Fixed operating expense
92160
103680
115200
311040
Total Fixed cost
167040
241930
288000
696970
Net Income
$68480
$-17250
$34560
$85790
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