Preparing a segmented income statement for various scenarios assists management in determining the estimated financial impact of making one choice over another. It is expected that you understand how costs behave and that you are familiar with the contribution margin concept. This case expands on these ideas by examining different types of fixed costs.

The company we are looking at in this module makes two products and is considering adding one more since the company has excess capacity. One aspect of making this decision is to screen the various scenarios to determine the potential profitability. Financial information alone does not tell us what to do, but it is a good start.

TYZ Company currently manufactures two products, Y and Z. The company has the capacity to make one additional product, with two (P1 and P2) currently under consideration. The forecasted annual sales and related costs for each new product are as follows.

		Product P1	Product P2
Sales		$320,000	$320,000
Variable costs
	Production (%)	50%	70%
	Selling and administrative (%)	10%	5%
Direct fixed expenses		$25,000	$12,500

See below for the income statement for last years operations for TYZ Company.

		Product Y	Product Z	Total
Sales		$275,000	$400,000	$675,000
Less variable expenses
	Production	100,000	200,000	300,000
	Selling and administrative	20,000	60,000	80,000
Contribution margin		$155,000	$140,000	$295,000
	Less direct fixed expenses	10,000	55,000	65,000
Segment margin		$145,000	$85,000	$230,000
	Less common fixed expenses			75,000
Net income				$155,000 =======

Common fixed costs are allocated to each product line on the basis of sales revenues.

Required:

Computations (use Excel).

Prepare a variable costing income statement that includes products Y, Z, and P1. Repeat for products Y, Z, and P2.

I do not understand how to calculate less common fixed expenses