Segment Variable Costing Income Statement and Effect on Income of Change in Oper
ID: 2418068 • Letter: S
Question
Segment Variable Costing Income Statement and Effect on Income of Change in Operations
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.
Required:
1. Prepare an income statement for the past year in the variable costing format. Enter all amounts as positive numbers.
Valdespin Company
Contribution Margin by Size Segment
For the Year Ended June 30, 2014
Size S
Size M
Size L
Total
Sales
$
$
$
$
Variable cost of goods sold
Manufacturing margin
$
$
$
$
Variable operating expenses
Contribution margin
$
$
$
$
Fixed costs:
Manufacturing costs
$
Operating expenses
Total fixed costs
$
Income from operations
$
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1. 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.
Learning Objective 4.
Hint(s)
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.
$
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2. Contribution margin for Size M - reduction in fixed production costs - reduction in fixed operating expenses = reduction in annual income from operations
Learning Objective 4.
Hint(s)
3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. The expenditure of $34,560 for the rental of additional warehouse space can be added to the fixed operating expenses. Enter all amounts as positive numbers.
Valdespin Company
Contribution Margin—Proposal 3
For the Year Ended June 30, 2014
Size S
Size L
Total
Sales
$
$
$
Variable cost of goods sold
Manufacturing margin
$
$
$
Variable operating expenses
Contribution margin
$
$
$
Fixed costs:
Manufacturing costs
$
Operating expenses
Total fixed costs
$
Income from operations
$
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3. 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. Remember that operating expenses should be $311,040 + $34,560 = $345,600.
Hint(s)
4. By how much would total annual income increase above its present level if Proposal 3 is accepted?
$
Hint(s)
1. Prepare an income statement for the past year in the variable costing format. Enter all amounts as positive numbers.
Valdespin Company
Contribution Margin by Size Segment
For the Year Ended June 30, 2014
Size S
Size M
Size L
Total
Sales
$
$
$
$
Variable cost of goods sold
Manufacturing margin
$
$
$
$
Variable operating expenses
Contribution margin
$
$
$
$
Fixed costs:
Manufacturing costs
$
Operating expenses
Total fixed costs
$
Income from operations
$
Explanation / Answer
Answer 1 Valdespin Company Contribution Margin by Size Segment For the Year Ended June 30, 2014 Particulars Size S Size M Size L Total In $ In $ In $ In $ Sales 668000 737300 956160 2361460 (-) Variable cost of goods sold 300000 357120 437760 1094880 Manufacturing margin 368000 380180 518400 1266580 (-) Variable operating expenses 132480 155500 195840 483820 Contribution margin 235520 224680 322560 782760 (-) Fixed costs: Manufacturing costs 385930 Operating expenses 311040 Total fixed costs 696970 Income from operations 85790 Answer 2 Calculation of Reduction in Income if proposal 2 is selected - Discontinue Size M Particulars Total in $ Contribution Margin from Size M 224680 (-) reduction in Fixed costs: Manufacturing costs 46080 Operating expenses 32240 Total fixed costs 78320 Reduction in annual income from operations 146360 The total annual income from operation would be reduced by $143360 if proposal 2 is accepted. Answer 3 Income statement if proposal 3 is accepted Valdespin Company Contribution Margin by Size Segment For the Year Ended June 30, 2014 Particulars Size S Size L Total In $ In $ In $ Sales 868400 956160 1824560 (-) Variable cost of goods sold 300000 437760 737760 Manufacturing margin 568400 518400 1086800 (-) Variable operating expenses 132480 195840 328320 Contribution margin 435920 322560 758480 (-) Fixed costs: Manufacturing costs 385930 Operating expenses 345600 Total fixed costs 731530 Income from operations 26950 If proposal 3 is accepted , the total annual income would decrease by $58840 from its present level.