There's a company that 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 What if P2s variable production costs were reduced to 55 of sales Prepare another variable costing income statement to show the change Suppose that you could add both P1 and P2, if either Y or Z is dropped Would you drop one of the current products to add both P1 and P2 Show computations in Excel that will support a written answer in the memo Memo (use Word) Analyze the computations in Excel and evaluate the three related proposals before making a recommendation Do you recommend adding product P1 or P2 Do the lower production costs change your recommendation See question 3 above Which of the products looks the most profitable Assuming no restraint on customer demand or resources, which product would you choose in order to maximize profitability What about qualitative, as opposed to quantitative, concerns

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There's a company that makes two products and is considering adding one more since the company has excess capacity. One aspect of making this decision

There's a company that 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.

What if P2s variable production costs were reduced to 55% of sales? Prepare another variable costing income statement to show the change.

Suppose that you could add both P1 and P2, if either Y or Z is dropped. Would you drop one of the current products to add both P1 and P2? Show computations in Excel that will support a written answer in the memo.

Memo (use Word).

Analyze the computations in Excel and evaluate the three related proposals before making a recommendation.

Do you recommend adding product P1 or P2?

Do the lower production costs change your recommendation?

See question 3 above.

Which of the products looks the most profitable? Assuming no restraint on customer demand or resources, which product would you choose in order to maximize profitability? What about qualitative, as opposed to quantitative, concerns?