Segment variable costing income statement and effect on income of change in oper
ID: 2508993 • Letter: S
Question
Segment variable costing income statement and effect on income of change in operations
Instructions
Labels and Amount Descriptions
Variable Costing Income Statement - Proposal 1
Additional Question - Proposal 2
Variable Costing Income Statement - Proposal 3
Final Question
X
Instructions
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
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
1.
2.
3.
4.
If the Proposal (3) is accepted, the net profit will increase by $46,975. ($132,765 - $85,790).
VALDESPIN COMPANY Variable costing Income Statement Size S Size M Size L Total Sales 668000 737300 956160 2361460 Variable Expenses Cost of Goods Sold 300000 357120 437760 1094880 Operating Expenses 132480 155500 195840 483820 Total variable Expenses 432480 512620 633600 1578700 Contribution Margin 235520 224680 322560 782760 Fixed Expenses Cost of Goods Sold 385930 Operating Expenses 311040 Total Fixed Expenses 696970 Income from operations 85790