Valdespin Company manufactures three sizes of camping tentssmall (S), medium (M), and large (L). The income statement
Question:
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, 2014, is as follows:
Instructions
1. Prepare an income statement for the past year in the variable costing format. Use the following headings:
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 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. Use the following headings:
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? Explain.
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Step by Step Answer:
Financial and Managerial Accounting
ISBN: 978-1285078571
12th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac