Question

quired) Saved Help Save & Exit Sub Check my work 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 $1,035,000 676,200 358,800 316,000 $ 42,800 Comercial Residential 5 345,000 690,000 179,400 496,800 165,600 193,200 142,000 178, $ 23,600 $ 19,200 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 foxed expenses include $58,500 of common foxed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $88.000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $66.000 of fixed expenses that would be avoided if the Residential segment is dropped Required:

Answer 1

Answer to first 4 parts of the question: 1) No, I do not agree with intern's decision to use an absorption format for her segmented income statement as it doesn't reflect each segment's actual profit generating capacity. 2) Segment format income statement Total Commercial Residential $1,035,000 $345,000 $690,000 --> (a) $676,200 $179,400 $496,800 $358,800 $165,600 $ 193,200 --> (b) Sales Cost of goods sold Gross Profit Traceable Expenses: Variable sell. & admin.- Commission Traceable fixed sell. & admin. exp. Total segement expenses Segment margin Common fixed expenses Net operating income $103,500 $154,000 $257,500 $101,300 $58,500 $42,800 $34,500 $88,000 $122,500 $43,100 $69,000 --> (a) x 10% --> Sales commission $66,000 (Given] $135,000 --> (c) $58,200 --> (b) - (c) Review: Total selling and administrative expenses Variable sell. & admin.- Commission Traceable fixed sell. & admin. exp. a) Common fixed expenses allocated to segments Commercial Residential $142,000 $174,000 $34,500 $69,000 $88,000 $66,000 $19,500 $39,000 Total $316,000 $103,500 $154,000 $58,500

b) She used Sales as the base to allocate common fixed expenses because it is allocated in the ratio of $19500 : $39000 = 1:2. The sales ratio of $345000 : $690000 is also 1: 2 only. 3) No, I do not agree with intern's decision to allocate common fixed expenses to her segments as it doesn't reflect each segment's actual profit generating capacity though they are profitable. 4) Toxaway Company Contribution format income statement Total Commercial Residential Sales $1,035,000 $345,000 $690,000 -->(a) Less variable expenses: Cost of goods sold $676,200 $179,400 $496,800 Sales commission $103,500 $34,500 $69,000 --> (a) x 10% --> Sales commission Total variable expenses $779,700 $213,900 $565,800 --> (b) Contribution margin $255,300 $131,100 $124,200 --> (a) - (b) Fixed expenses: Selling and admin. expenses $154,000 $88,000 $66,000 (Given] Common fixed expenses $58,500 $19,500 $39,000 (Ref: Requirement-2a] Total fixed expenses $212,500 $107,500 $105,000 Net operating income $42,800 $23,600 $19,200 [Contribution margin - Fixed expenses]