Question

Problem 7-24 Companywide and Segment Break-Even Analysis; Decision Making [LO7-4, LO7-5] Toxaway Company is a merchandiser that segments its business into two divisions-Commercial and Residential. The company's accounting intern was asked to prepare segmented income statements that the company's divisional managers could use to calculate their break-even points and make decisions. She took the prior month's companywide income statement and prepared the absorption format segmented income statement shown below Total Commercial Residential Company $1,005,000 $335,000 $670,000 180,900 154,100 Sales Cost of goods sold Gross margin Selling and administrative 670,000 335,000 489,100 180,900 308,000 138,000 170,000 expenses $ 27,000 16,100 $ 10,900 Net operating income In preparing these statements, the intern determined that Toxaway's only variable selling and administrative expense is a 10% sales commission on all sales. The company's total fixed expenses include $61,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $84,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $62,000 of fixed expenses that would be avoided if the Residential segment is dropped. Required: 1. Do you agree with the intern's deecision to use an absorption format for her segmented income statement? 2. Based on a review of the intern's segmented income statement: a. How much of the company's common fixed expenses did she allocate to the Commercial and Residential segments? b. Which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments: (a) sales, (b) cost of goods sold, or (c) gross margin? 3. Do you agree with the intern's decision to allocate the common fixed expenses to the Commercial and Residential segments? 4. Redo the intern's segmented income statement using the contribution format. 5. Compute the companywide break-even point in dollar sales. 6. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division 7. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $14,500 and $29,000, respectively, and to lower its companywide sales commission percentage from 10% to 5%. Calculate the new break-even point in dollar sales for the Commercial Division and the Residential Division

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four questions should be answered. kindly take note of it.

Part 1

No

In income statement using absorption format fixed overheads and variable overheads are not reported separately and thus the purpose of calculating breakeven point using segmented income statement is not served. Therefore, the intern’s decision of using absorption format for income statement is inappropriate.

Part 2 a

	Commercial	Residential
Common fixed expenses	$22000	$44000

	Total	Commercial	Residential
Total selling and administrative expense (a)	308000	138000	170000
Traceable fixed expenses	146000	84000	62000
Sales commissions (10% * sales)	100500	33500	67000
Selling and administrative expenses accounted for (b)	246500	117500	129000
Common fixed expenses (a)-(b)	61500	20500	41000

Part 2 b

(a) Sales

Sales of Residential segment is double of the commercial segment. In the same way, the allocation of fixed expenses to Residential segment is double of the commercial segment and therefore it can be said that she most likely used to allocate common fixed expenses to the Commercial and Residential segments on the basis of sales.

Part 3

No. The allocation of fixed expenses is an inappropriate decision as they are not traceable segments as well as unaffected by segment-level decisions.

Part 4

	Total	Commercial	Residential
Sales	1005000	335000	670000
Variable expenses:
Cost of goods sold	670000	180900	489100
Sales commissions (10%* sales)	100500	33500	67000
Total variable expenses	770500	214400	556100
Contribution margin	234500	120600	113900
Traceable fixed expenses	146000	84000	62000
Segment margin	88500	36600	51900
Common fixed expenses	61500
Net operating income	27000