PR $7-5$A Segment variable costing income statement and effect on operating income of change in operations

Obj. $4$

Contribution hargin, Size S$,$ $$235,520$

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$.$

$($Continued$)$