Extreme Camping Company – Decision to close or continue the operations

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Extreme Camping Company – Decision to close or continue the operations
Segment variable costing income statement and effect on income of change in operations
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.
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, 2012, is as follows: Hide Hint(s)
Extreme Camping Company
Sizes
S
M
L
Total
Sales
$8,35,000
$9,21,600
$11,95,200
$29,51,800
Cost of goods sold
$0
Variable costs
$3,75,000
$4,46,400
$5,47,200
$13,68,600
Fixed Costs
$93,600
$1,72,800
$2,16,000
$4,82,400
Total cost of goods sold
$4,68,600
$6,19,200
$7,63,200
$18,51,000
$0
Gross Profit
$3,66,400
$3,02,400
$4,32,000
$11,00,800
Less: Operating expenses
$0
Variable expense
$1,65,600
$1,94,400
$2,44,800
$6,04,800
Fixed expenses
$1,15,200
$1,29,600
$1,44,000
$3,88,800
Total Operating expenses
$2,80,800
$3,24,000
$3,88,800
$9,93,600
Income from Operations
$85,600
-$21,600
$43,200
$1,07,200
1. Prepare an income statement for the past year in the variable costing format.
Enter all amounts as positive numbers. Extreme Camping Company Contribution Margin by Size Segment For the Year Ended June 30, 2012 Size S Size M Size L Total Sales $ $ $ $ Variable cost of goods sold Manufacturing margin $ $ $ $ Variable operating expenses Contribution margin $ $ $ $ Fixed costs: Manufacturing costs $ Operating expenses Total fixed costs $ Income from operations $
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 varaible costing format, indicating the projected annual income from operations if proposal 3 is accepted.

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