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 $1,005,000 670,000 335,000 308,000 $ 27,000 Commercial Residential $ 335,000 $ 670,000 180.900 489, 100 154,100 180,900 138,000 170,000 $ 16,100 $ 10,900 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 $61,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $84,000 of fixed expenses that would disappear if the Commercial segment is dropped, and $62,000 of fixed expenses that would disappear 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 $14,500 and $29,000, 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 Complete this question by entering your answers in the tabs below.

Answer 1

1. Her idea of using absorption costing is not good because:- It does not focus on cost behavior., Costs are not allocated in fixed and variable expenses so it is not posssible to conduct break even analysis.

2.

In the current scenario the total selling and administrative costs have been allocated to the divisions based on
	their gross margin ratio.
	Calculation of Gross Margin Ratio is calculated for both the divisions as below:
	Gross Margin of C Division	Gross Margin of C/Gross Margin of Total Company
		154100/335000
		46%
	Gross Margin of D Division	Gross Margin of D/Gross Margin of Total Company
		180900/335000
		54%
	Selling and administrative Expenses have been allocated based on the gross margin ratio

3.

The decision cannot be agreed with respect to allocation of fixed expenses as there are traceable fixed cost and Variable component of selling and administrative department which is segregated to each division

4. INCOME STATEMENT USING CONTRIBUTION FORMAT

	Commercial	Residential	Total
Sales	335000	670000	1005000
(-) variable expenses
Cost of goods sold	180900	489100	670000
Selling and admin (10%)	33500	67000	100500
total variable cost	214400	556100	770500
Contribution margin	120600	113900	234500
Less: traceable fixed cost	84000	62000	146000
Segment margin	36600	51900	88500
Less: common fixed cost			61500
Net operating income			27000