Valdespin Company manufactures three sizes of camping tents—small (S), medium (M
ID: 2569076 • Letter: V
Question
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, 2016, is as follows:
1
Size S
Size M
Size L
Total
2
Sales
$668,000.00
$737,300.00
$956,160.00
$2,361,460.00
3
Cost of goods sold:
4
Variable costs
$300,000.00
$357,120.00
$437,760.00
$1,094,880.00
5
Fixed costs
74,880.00
138,250.00
172,800.00
385,930.00
6
Total cost of goods sold
$374,880.00
$495,370.00
$610,560.00
$1,480,810.00
7
Gross profit
$293,120.00
$241,930.00
$345,600.00
$880,650.00
8
Less operating expenses:
9
Variable expenses
$132,480.00
$155,500.00
$195,840.00
$483,820.00
10
Fixed expenses
92,160.00
103,680.00
115,200.00
311,040.00
11
Total operating expenses
$224,640.00
$259,180.00
$311,040.00
$794,860.00
12
Income from operations
$68,480.00
$(17,250.00)
$34,560.00
$85,790.00
1
Size S
Size M
Size L
Total
2
Sales
$668,000.00
$737,300.00
$956,160.00
$2,361,460.00
3
Cost of goods sold:
4
Variable costs
$300,000.00
$357,120.00
$437,760.00
$1,094,880.00
5
Fixed costs
74,880.00
138,250.00
172,800.00
385,930.00
6
Total cost of goods sold
$374,880.00
$495,370.00
$610,560.00
$1,480,810.00
7
Gross profit
$293,120.00
$241,930.00
$345,600.00
$880,650.00
8
Less operating expenses:
9
Variable expenses
$132,480.00
$155,500.00
$195,840.00
$483,820.00
10
Fixed expenses
92,160.00
103,680.00
115,200.00
311,040.00
11
Total operating expenses
$224,640.00
$259,180.00
$311,040.00
$794,860.00
12
Income from operations
$68,480.00
$(17,250.00)
$34,560.00
$85,790.00
Explanation / Answer
1.
2. If proposal 2 is accepted , i.e Size M is discontinued :-
Therefore reduction in Total income from operations = 85790 - (-60570) = 146,360
3.
4 . The total income from operations is reduced from 85790 to -102794 = 188,584
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Size S Size M Size L Total 1 Sales 668,000.00 737,300.00 956,160.00 2,361,460.00 2 Variable costs : 3 Cost of goods sold 300,000.00 357,120.00 437,760.00 1,094,880.00 4 Variable expenses 132,480.00 155,500.00 195,840.00 483,820.00 5 Contribution 235,520.00 224,680.00 322,560.00 782,760.00 6 Fixed Costs : 7 Cost of goods sold 385,930.00 8 Fixed expenses 311,040.00 9 Income from operations 85,790.00Related Questions
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