Question

Stationfire Company segments its business into two regions—East and West. The company prepared a contribution format segmented income statement as shown below:

	Total Company			East			West
Sales	$	1,125,000		$	750,000		$	375,000
Variable expenses		843,750			600,000			243,750
Contribution margin		281,250			150,000			131,250
Traceable fixed expenses		160,000			62,000			98,000
Segment margin		121,250		$	88,000		$	33,250
Common fixed expenses		50,000
Net operating income	$	71,250

Required:

1. Compute the companywide break-even point in dollar sales.

2. Compute the break-even point in dollar sales for the East region.

3. Compute the break-even point in dollar sales for the West region.

4. Prepare a new segmented income statement based on the break-even dollar sales that you computed in requirements 2 and 3. Use the same format as shown above. What is Station fire’s net operating income (loss) in your new segmented income statement?

5. Do you think that Stationfire should allocate its common fixed expenses to the East and West regions when computing the break-even points for each region?

Answer 1

Requirement: 1 Contribution margin ratio = (Contribution / sales) * 100 Contribution margin 281250 Sales 1125000 Contribution margin ratio 25 % Fixed Expenses = Traceable fixed expenses + Common Fixed expenses Traceable fixed expenses 160000 Common fixed expenses 50000 Fixed Expenses 210000 Dollar sales for company to break even = Fixed cost / Contribution margin ratio Fixed cost 210000 Contribution margin ratio Break even point in Dollar sales 840000 0.25 Requirement: 2 East Region Dollar sales for Segment to break even = Fixed cost / Contribution margin ratio Fixed cost 62000 Contribution margin ratio 0.2 Break even point in Dollar sales 310000

Requirement: 3 West Region Dollar sales for Segment to break even = Fixed cost / Contribution margin ratio Fixed cost 98000 Contribution margin ratio 0.35 Break even point in Dollar sales 280000 Requirement: 4 Break even sales Variable expenses Contribution margin Traceable fixed expenses Segment margin Common fixed expenses Net operating income Total Company 840000 630000 210000 160000 50000 50000 East 310000 248000 62000 620001 West 280000 182000 98000 98000 Requirement: 5 "NO" Common fixed cost should not allocate to the East and West Region while Computing Break even point