Question

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 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.

Answer 1

1.No, do not agree
2.a.
Allocation of common expenses is as follows
	Commercial	Residential
Selling and Admin Expenses	116,000	148,000
Less: Sales Commission	28,000	56,000
Less: Traceable fixed expenses	62,000	40,000
Common Expenses Allocated	26,000	52,000
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	840,000	280,000	560,000
Less: Variable Expenses
Cost of Goods Sold	557,200	154,000	403,200
Selling and Admin Expenses	84,000	28,000	56,000
Contribution Margin	198,800	98,000	100,800
Less: Traceable Fixed Expenses	102,000	62,000	40,000
Segment Margin	96,800	36,000	60,800
Less: Common Fixed Expenses	78,000
Net Operating Income	18,800
5.Contribution Margin Ratio = Contribution Margin/Sales
=198800/840500
23.67%
Break even point = Fixed costs/CM Ratio
760563.3803
6. Commercial Division = 62,000/35% = $177,142.86
Residential = 40,000/18% = $222,222.22
7.Commercial = (62000+17000)/40% = $197500
Residential = (40,000+34,000)/23% = $321,739.13