Question

Taxaway 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 Cost of goods sold Gross margin Selling and administrative expenses Net operating income Total Company $750,000 500.000 250,000 240,000 $ 10,000 Commercial Residential $250,000 $500,000 140.000 360.000 140.000 104,000 136,000 $ 6,000 $ 4,000 130.000 140,00 In preparing these statements, the intern determined that Tokaway's only variable selling and administrative expense is a 10% sales commission on all sales. The company's total fixed expenses include $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $38,000 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 $15,000 and $30,000, 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. Req1 Reg 2 Req 28 Reg 3 Reg 4 Req 7 Do you agree with the intern's decision to use an absorption format for her segmented income statement?

Answer 1

1.No, do not agree
2.a.
Allocation of common expenses is as follows
	Commercial	Residential
Selling and Admin Expenses	104,000	136,000
Less: Sales Commission	25,000	50,000
Less: Traceable fixed expenses	55,000	38,000
Common Expenses Allocated	24,000	48,000
b.Sales, is used since expenses allocated in the ratio of 1:2
3.No, Since common expenses are unavoidable
4.Contribution Margin format Income Statement
	Total	Commercial	Residential
Sales	750,000	250,000	500,000
Less: Variable Expenses
Cost of Goods Sold	500,000	140,000	360,000
Selling and Admin Expenses	75,000	25,000	50,000
Contribution Margin	175,000	85,000	90,000
Less: Traceable Fixed Expenses	93,000	55,000	38,000
Segment Margin	82,000	30,000	52,000
Less: Common Fixed Expenses	72,000
Net Operating Income	10,000
5.Contribution Margin Ratio = Contribution Margin/Sales
=175000/750,000 = 23.33%
Break even point = Fixed costs/CM Ratio
=(93,000+72,000)/23.33% = $707,243.89
6. Commercial Division = 55,000/34% = $161,764.71
Residential = 38,000/18% = $211,111.11
7.Commercial = (55,000+15,000)/39% = $179,487.18
Residential = (38,000+30,000)/23% = $295,652.17