Segment variable costing income statement and effect on operating income of change in operations

Valdespin Company manufactures three sizes of camping tentssmall (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:

	Size
	S		M		L		Total
Sales	$668,000		$737,300		$956,160		$2,361,460
Cost of goods sold:
Variable costs	$(300,000)		$(357,120)		$(437,760)		$(1,094,880)
Fixed costs	(74,880)		(138,250)		(172,800)		(385,930)
Total cost of goods sold	$(374,880)		$(495,370)		$(610,560)		$(1,480,810)
Gross profit	$293,120		$241,930		$345,600		$880,650
Operating expenses:
Variable expenses	$(132,480)		$(155,500)		$(195,840)		$(483,820)
Fixed expenses	(92,160)		(103,680)		(115,200)		(311,040)
Total operating expenses	$(224,640)		$(259,180)		$(311,040)		$(794,860)
Operating income (loss)	$68,480		$(17,250)		$34,560		$85,790

Required:

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1. Prepare an income statement for the past year in the variable costing format. Data for each size 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 operating income.

Valdespin Company Variable Costing Income Statement For the Year Ended June 30, 20Y9

	Size S	Size M	Size L	Total
Sales	$fill in the blank c56df4fe2fb8fb2_1	$fill in the blank c56df4fe2fb8fb2_2	$fill in the blank c56df4fe2fb8fb2_3	$fill in the blank c56df4fe2fb8fb2_4
Variable cost of goods sold	fill in the blank c56df4fe2fb8fb2_5	fill in the blank c56df4fe2fb8fb2_6	fill in the blank c56df4fe2fb8fb2_7	fill in the blank c56df4fe2fb8fb2_8
Manufacturing margin	$fill in the blank c56df4fe2fb8fb2_9	$fill in the blank c56df4fe2fb8fb2_10	$fill in the blank c56df4fe2fb8fb2_11	$fill in the blank c56df4fe2fb8fb2_12
Variable operating expenses	fill in the blank c56df4fe2fb8fb2_13	fill in the blank c56df4fe2fb8fb2_14	fill in the blank c56df4fe2fb8fb2_15	fill in the blank c56df4fe2fb8fb2_16
Contribution margin	$fill in the blank c56df4fe2fb8fb2_17	$fill in the blank c56df4fe2fb8fb2_18	$fill in the blank c56df4fe2fb8fb2_19	$fill in the blank c56df4fe2fb8fb2_20
Fixed costs:
Manufacturing costs				$fill in the blank c56df4fe2fb8fb2_21
Operating expenses				fill in the blank c56df4fe2fb8fb2_22
Total fixed costs				$fill in the blank c56df4fe2fb8fb2_23
Operating income				$fill in the blank c56df4fe2fb8fb2_24

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2. Based on the income statement prepared in (1) and the other data presented, determine the amount by which total annual operating income would be reduced below its present level if Proposal 2 is accepted. $fill in the blank a3bb00016060fb4_1

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3. Prepare an income statement in the variable costing format, indicating the projected annual operating income 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.

Valdespin Company Variable Costing Income Statement For the Year Ended June 30, 20Y9

	Size S	Size L	Total
Sales	$fill in the blank a526fdfc8043046_1	$fill in the blank a526fdfc8043046_2	$fill in the blank a526fdfc8043046_3
Variable cost of goods sold	fill in the blank a526fdfc8043046_4	fill in the blank a526fdfc8043046_5	fill in the blank a526fdfc8043046_6
Manufacturing margin	$fill in the blank a526fdfc8043046_7	$fill in the blank a526fdfc8043046_8	$fill in the blank a526fdfc8043046_9
Variable operating expenses	fill in the blank a526fdfc8043046_10	fill in the blank a526fdfc8043046_11	fill in the blank a526fdfc8043046_12
Contribution margin	$fill in the blank a526fdfc8043046_13	$fill in the blank a526fdfc8043046_14	$fill in the blank a526fdfc8043046_15
Fixed costs:
Manufacturing costs			$fill in the blank a526fdfc8043046_16
Operating expenses			fill in the blank a526fdfc8043046_17
Total fixed costs			$fill in the blank a526fdfc8043046_18
Operating income			$fill in the blank a526fdfc8043046_19

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4. By how much would total annual operating income increase above its present level if Proposal 3 is accepted? $fill in the blank 6e458808f04bfc3_1