Question

Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income Total Company $ 840,000 557,200 282,800 264,000 $ 18,800 Commercial Residential $ 280,000 $ 560,000 154,000 403, 200 126,000 156,800 116,000 148,000 $ 10,000 $ 8,800 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 $78,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $62,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $40,000 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 $17,000 and $34,000, 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

Answer with working notes is given below

1. No Absorption format is not recommended for segmented income statement Absorption costing format does not help in understanding the contribution margin of each division 2.a) Total Selling and administration expense Less: Sales Commission Less: Direct Fixed Cost Common expenses allocated Commercial Residential $116,000 $148,000 $28,000 $56,000 $62,000 $40,000 $26,000 $52,000 Total $264,000 $84,000 $102,000 $78,000 2.b) Sales basis Commercial (78,000/280,000)*840,000 Residential (78,000/560,000) *840,000 $26,000 $52,000 3 No, Common fixed expense should not be allocated Segmented Income Statement - Contribution Format Total Commercial Residential Sales $840,000 $280,000 $560,000 Variable cost COGS $557,200 $154,000 $403,200 Sales Commission $84,000 $28,000 $56,000 Contribution Margin $198,800 $98,000 $100,800 Direct Fixed expenses $102,000 $62,000 $40,000 Segment Margin $96,800 $36,000 $60,800 Common Fixed Expense $78,000 Net Operating Income $18,800 5. Break Even point Contribution Margin % (Contribution/Sales) 23.67% ($198,800/$840,000) Fixed Cost $180,000 Break Even point (Fixed Cost/Contribution Margin %) $760,563 Break Even Point Contribution Margin Sales Contribution Margin % Commercial Residential $98,000 $100,800 $280,000 $560,000 35.0% 18.0% Fixed Cost $62,000 $40,000 $177,143 $222,222 Break Even point (Fixed Cost/Contribution Margin %) New Break Even point 1. Sales COGS Sales Commission Contribution Contribution Margin % (Fixed Cost/Contribution Margin %) Commercial Residential $280,000 $560,000 $154,000 $403,200 $14,000 $28,000 Revised 5% $112,000 $128,800 40.0% 23.0% Direct Fixed Cost Sales and administration expenses Revised Fixed cost $62,000 $17,000 $79,000 $40,000 $34,000 $74,000 $197,500 $321,739 Break Even Point (Fixed Cost/Contribution Margin %)