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, 2016, is
as follows:
Size S
1
2 Sales
3
Total cost of
goods sold
7 Gross profit
9
12
$668,000.00
$737,300.00
$956,160.00
$2,361,460.00
$300,000.00
$357,120.00
$437,760.00
$1,094,880.00
74,880.00
138,250.00
172,800.00
385,930.00
$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
$483,820.00
92,160.00
103,680.00
115,200.00
311,040.00
$224,640.00
$259,180.00
$311,040.00
$794,860.00
$68,480.00
$(17,250.00)
$34,560.00
$85,790.00
Less operating
expenses:
Variable
expenses
10 Fixed expenses
11
Total
sold:
5 Fixed costs
8
Size L
Cost of goods
4 Variable costs
6
Size M
Total operating
expenses
Income from
operations
Required:
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.*
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
Size S
1
Size M
Size L
Total
Proposal 2 is accepted.
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?
* 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.
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.
Valdespin Company
Variable Costing Income Statement
1
2
3
4
5
6
7 Fixed costs:
8
9
10
11
Size S
Size M
Size L
Total
