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 $ 780,000 517,400 262,600 248,000 $ 14,600 Commercial Residential $ 260,000 $ 520,000 143,000 374,400 117,000 145,600 108,000 140,000 $ 9,000 $ 5,600 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 $84,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $54,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $32,000 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 $13,000 and $26,000, 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

Sales Cost of Goods Sold Gross Margin Selling and Admin Expenses Net Operating Income Total Company Commercial 780000 260000 517400 143000 262600 117000 248000 108000 14600 9000 Residential 520000 374400 145600 140000 5600 NO 1) 2) Do you Agree the Intern's Decision to use an absorption Income Statement Common Fixed cost allocated between the commercial and residential cost Commercial Residential Common Fixed Expenses 28000 56000 Common Fixed cost = Segment Margin From Variable Costing - Divisional Profit from Absorption costing Commercial 37000 9000 Residential 61600 5600 28000 56000 what allocation bases did she most likely used Do You Agree with the intern's decision to allocate common fixed cost Sales NO 3

4 Total Company Commercial 780000 260000 Residential 520000 Sales Variable Expenses Cost of Goods Sold Sales Commission (10% on sales ) Total Variable Cost Contribution Margin Traceable Fixed Expenses Segment Margin Common Fixed cost Segment Margin 517400 78000 595400 184600 86000 98600 84000 14600 143000 26000 169000 91000 54000 37000 374400 52000 426400 93600 32000 61600 5 Break Even Point in Dollars Fixed cost = 84000 + CM Ratio 184600 / 86000 780000 Fixed Cost / CM ratio 170000 23.667% Break Even Point 170000 / 23.667% 718300 or 718310

6 Fixed Cost CM Ratio Commercial 54000 35.00% Commercial 154286 Residential 32000 18.00% Residential 177778 Break Even Dollars 7 New Break Even Point IF Sales Commission Revised Commercial 260000 Residential 520000 Sales Variable Expenses Cost of Goods Sold Sales Commission (5%) Total Variable Cost Contribution Margin 143000 13000 156000 104000 374400 26000 400400 119600 Traceable Fixed Expenses Salary Total Fixed Cost CM ratio 54000 13000 67000 40.00% 32000 26000 58000 23.00% Commercial 167500 Residential 252174 Break Even Dollars = Fixed cost / CM ratio