PR $21-5$A $,$ Segment Variable Costing Income Statement and Effect on Operating Income of Change in Operations

Obj. $4$ 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 $30,20$Y$9,$ is as follows:

$\backslash$table$[[,$Size,$\backslash$table$[[$Total$]]],[,5,$M$,$L$],[$Sales $..........................................,$s$668,000,$$ $737,300,956,160,$$$2,361,460$