PR 20-5A Segment variable costing income statement and effect on income of chang
ID: 2488326 • Letter: P
Question
PR 20-5A Segment variable costing income statement and effect on income of change in operations
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 vwould 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 M L Total
Sales…. $668,000 $737,300 $956,160 $2,361,460
Cost of goods:
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
Less 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
Instructions
Prepare an income statement for the past year in the variable costing format. Use the following headings:
Size
S M L Total
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.
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.
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:
Size
S L Total
Data 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 the problem, the expenditure of $34,560 for the rental of additional warehouse space can be added to the fixed operating expenses.
By how much would the total annual income increase above its present level if Proposal 3 is accepted? Explain
Explanation / Answer
Answer: income statement for the past year in the variable costing format.
Answer:2 If Proposal 2 is accepted than annual income from operation is reduced by $ (85790-(-60570)=146360
Answer:
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:
Answer:The total annual income increase above its present level is (139136-85790)=53346 if Proposal 3 is accepted.
Size Particulars S M L Total Sales 668000 737300 956160 2361460 Less: Variable expenses Variable cost 300000 357120 437760 1094880 Variable operating expenses 132480 155500 195840 483820 Total variable expenses 432480 512620 633600 1578700 Contribution margin 235520 224680 322560 782760 Less: Fixed expenses 0 Fixed costs 74880 138250 172800 385930 Fixed expenses 92160 103680 115200 311040 Total fixed expenses 167040 241930 288000 696970 Income from operations 68480 -17250 34560 85790Related Questions
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