Question

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.

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 $20,000 and $40,000, 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.

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: Sales Coat of goods sold Gross margin Selling and administrative expenses Net operating income Total Company $ 885,000 572,300 312,700 276,000 $ 36,700 Commercial Residential $295,000 $590,000 153,400 418,900 141,600 171,100 122,000 154,000 $ 19,600 $ 17,100 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 $73,500 of common fixed expenses that would continue to be Incurred even if the Commercial or Residential segments are discontinued, $68,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $46,000 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. 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 $20,000 and $40,000, 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. Complete this question by entering your answers in the tabs below. Req 1 Req 2A Reg 28 Reg 3 Req 4 Req 5 Req6 Req 7 Do you agree with the intern's decision to use an absorption format for her segmented income statement? Yes ONO Req2A >

Answer 1

Ques1 No The intern's decision to use the absorption format for her segmented income statements is a bad idea because it does not focus on cost behavior. To make decisions and perform break-even analysis, the contribution format is superior to the absorption format because it separates costs into variable cost and fixed cost categories. Ques 2 & 3 Total Total selling admn expenses Traceable fixed expenses Sales commissions selling and admn expenses accounted for Common fixed expenses commercial residential 276.000 122.cool 114,000 68000 88,500 295001 202 5001 9 7 soal 73,500 24,500 154,000 46000 59000 105.000 49,000 The amount of common fixed expenses allocated to Residential($49,000) is twice as much as the amount of common fixed expenses allocated to Commercial ($24,500). Because the Residential sales ($590,000) are twice as much as the Commercial sales ($295,000), it appears that the common fixed expenses were allocated to segments based on sales dollar Ques 4 Total residential commercial 885,000 295,000 590,000 Sales Variable expenses cost of goods sold sales comissions total variable expenses contribution margin Traceable fixed expenses Segment marein Corri mon fixed expenses Net operating income 572,300 88,500 660.800 224.200 114,000 110,200 73,500 36,700 153,400 295001 182.90al 112.100 68,000 44,100 418,900 59000 477.900 112,100 46,000 66,100 Ques5 dollar sales to breakeven = fixed expenses / overall CM ratio dollar sales to breakeven = dollar sales to breakeven = (114000+73500)/(224200/885000) 740,132 Ques6 commercial Traceable fixed expenses Segment contribution margin Breakeven sales in dollars(a/b) 68,000 0.38 residential 46,000 0.19 S Ques 7 885,000 commercial residential 295,000 590,000 Sales Variable expenses 1 5 sales comissions total variable expenses contribution margin Traceable fixed expenses Segment margin Common fixed expenses Net operating income 72,3001 14,250 616.5501 268,450 174,000 94,450 57,750 36.7001 153,400 11750 168.150l 126,8501 88,000 38,850 418,900 29500 448.400 141,600 86,000 55,600 commercial Traceable fixed expenses Segment contribution margin Breakeven sales in dollars(a/b) residential 88,000 86,000 0.43 0.24 204,651 $ 358,333