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 $ 825,000 555,500 269,500 260,000 $ 9,500 Commercial Residential $275,000 $ 550,000 154,000 401,500 121,000 148,500 114,000 146,000 $ 7,000 $ 2,500 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 $79,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $60,000 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 $16,000 and $32,000, 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

1.No, do not agree
2.a.
Allocation of common expenses is as follows
	Commercial	Residential
Selling and Admin Expenses	114,000	146,000
Less: Sales Commission	27,500	55,000
Less: Traceable fixed expenses	60,000	38,000
Common Expenses Allocated	26,500	53,000
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	825,000	275,000	550,000
Less: Variable Expenses
Cost of Goods Sold	555,500	154,000	401,500
Selling and Admin Expenses	82,500	27,500	55,000
Contribution Margin	187,000	93,500	93,500
Less: Traceable Fixed Expenses	98,000	60,000	38,000
Segment Margin	89,000	33,500	55,500
Less: Common Fixed Expenses	79,500
Net Operating Income	9,500
5.Contribution Margin Ratio = Contribution Margin/Sales
=187000/825000
22.67%
Break even point = Fixed costs/CM Ratio
783088.2353
6. Commercial Division = 60,000/34% = $176,470.59
Residential = 38,000/17% = $223,529.41
7.Commercial = (60000+16000)/39% = $194,871.79
Residential = (38,000+32,000)/22% = $318,181.82