Question

E2 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 ipped Company Commercial Residential $780,000 $260,000 $520,000 143,000 117,e00 Sales Cost of goods sold Gross margin Selling and administrative expenses 517,400 262,600 374,400 145,600 Book Ask 108,000 140,e00 248,000 $ 14,600 $ 9,000 Print $ 5,600 Net operating income ferences 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 $84,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $54,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $32,000 of fixed expenses that would be avoided if the Residential segment is dropped. Required: 1. Do you agree with the intern's decision to use an absorption format for her segmented income statement? 2. Based on a review of the intern's segmented income statement. 22 of 22 < Prev Next

Answer 1

Solution 1:
No, the intern’s decision to use an absorption format for her segmented income statement is not a good idea because because if break even is to be calculated then contribution format should be used rather than absorption format.
Solution 2a:
	Commercial	Residential
Total Selling and administrative expenses	108000	140000
Less: Direct fixed expesnes	54000	32000
Less: variable Sales Commission (10% of sales)	26000	52000
Common Fixed expesnes allocated to Segments	28000	56000
Solution 2b:
	Commercial	Residential	Total
Total Sales	260000	520000	780000
Ratio	0.33	0.67
Common Fixed expesnes allocated to Segments	28000	56000	84000
Ratio	0.33	0.67
Hence, Allocation is based on Sales. Option "a = Sales" is correct.
Solution 3:
No, we don’t agree with the intern’s decision to allocate common fixed expesnes because theses expenses does not directly related to segments.
Solution 4:
Segmented Income Statement (Using contribution format)
	Total	Commercial	Residential
Sales	780000	260000	520000
Variable expenses:
Cost of goods sold	517400	143000	374400
Sales commissions	78000	26000	52000
Total Variable expenses	595400	169000	426400
Contribution margin	184600	91000	93600
Less: Direct Fixed Expesnes	86000	54000	32000
Segment Margin	98600	37000	61600
Less: Common fixed expenses	84000
Net Operating Income	14600
Solution 5:
Companywide Break even point in dollar sales
	Total
Total Contribution margin	184600
/Total Sales	780000
Contribution Margin ratio	23.667%
Total Companywide Fixed Costs (86000+84000)	170000
/Contribution Margin ratio	23.667%
Companywide Break even point in dollar sales	718309
Solution 6:
Segment's Break even point in dollar sales
	Commercial	Residential
Segments Contribution margin	91000	93600
/Segment's Sales	260000	520000
Contribution Margin ratio	35.00%	18.00%
Direct Fixed Costs	54000	32000
/Contribution Margin ratio	35.00%	18.00%
Segment's Break even point in dollar sales	154286	177778
Solution 7:
Segment's Revised Break even point in dollar sales
	Commercial	Residential
Sales	260000	520000
Variable expenses:
Cost of goods sold	143000	374400
revised Sales commissions	13000	26000
Total Variable expenses	156000	400400
Contribution margin	104000	119600
Revised Contribution Margin ratio	40.00%	23.00%
Revised Direct Fixed Expesnes	67000	58000
/Contribution Margin ratio	40.00%	23.00%
Segment's Break even point in dollar sales	167500	252174