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:

	Total Company			Commercial			Residential
Sales	$	990,000		$	330,000		$	660,000
Cost of goods sold		663,300			181,500			481,800
Gross margin		326,700			148,500			178,200
Selling and administrative expenses		304,000			136,000			168,000
Net operating income	$	22,700		$	12,500		$	10,200

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 fixed expenses include $63,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $82,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $60,000 of fixed expenses that would be avoided if the Residential segment is dropped.

6. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

Answer 1

Solution SEGMENTED INCOME STATEMENT Total Company Commercial $990,000 $330,000 Residential $660,000 Sales Variable expenses: Cost of Goods sold Sales commission (10% of sales) $663,300 $99,000 $181,500 $33,000 $481,800 $ 66,000 $762,300 $227,700 $ 214,500 $115,500 $547,800 $112,200 Total variable expenses Contribution margin Traceable fixed expenses: Selling and administrative expenses $142,000 $82,000 $ 60,000 $82,000 $33,500 $60,000 $52,200 Total traceable fixed expenses Divisional segment margin Common fixed expenses Net operating income (loss) $142,000 $85,700 $63,000 $22,700 WN-1: Breakup of Selling and administrative expenses Total Company | Commercial Residential Variable expense Sales commission (10% of sales) $99,000 $33,000 $66,000 Traceable fixed expenses $142,000 $82,000 $60,000 Common fixed expenses $63,000 Total selling & administrative expenses $304,000

Required: Computation of break-even point in dollar sales for the Commercial Division and for the Residential Division Step-1: Compute the Contribution margin ratio of both the divisions Commercial $330,000 Residential $660,000 Sales (a) Less: Variable expenses Cost of Goods sold Sales commission (10% of sales) Divisional contribution margin (b) ($181,500) ($33,000) $115,500 ($481,800) ($66,000) $112,200 Contribution margin ratio (b/a) 35.00% 17.00% Step-2: Compute the break-even point in dollar sales Break-even sales (dollars) = Traceable fixed expenses / Contribution margin ratio L Traceable fixed expenses (a) Contribution margin ratio (b) (see step 1) Commercial $82,000 35.00% Residential $60,000 17.00% Break-even sales (dollars) (a/b) $234,285.71 $352,941.18