Extreme Camping Company manufactures three sizes of extreme weather 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 $57,600 and $40,300, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $43,200 for the rental of additional warehouse space would yield an increase of 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.
AND SO ON
1. Prepare an income statement for the past year in the variable costing format.
2. 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.
3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. The expenditure of $43,200 for the rental of additional warehouse space can be added to the fixed operating expenses.
4. By how much would total annual income increase above its present level if Proposal 3 is accepted?