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 $ 870,000 571,300 298,700 272,000 5 26,700 Commercial Residential $290,eee 5580,000 153,700 417,600 136,300 162.400 120,00 152.000 $ 16,30 $ 10,400 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 $75,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, 66,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $44,000 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 $19,000 and $38,000, 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	120,000	152,000
Less: Sales Commission	29,000	58,000
Less: Traceable fixed expenses	66,000	44,000
Common Expenses Allocated	25,000	50,000
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	870,000	290,000	580,000
Less: Variable Expenses
Cost of Goods Sold	571,300	153,700	417,600
Selling and Admin Expenses	87,000	29,000	58,000
Contribution Margin	211,700	107,300	104,400
Less: Traceable Fixed Expenses	110,000	66,000	44,000
Segment Margin	101,700	41,300	60,400
Less: Common Fixed Expenses	75,000
Net Operating Income	26,700
5.Contribution Margin Ratio = Contribution Margin/Sales
=211,700/870,000 = 24.33%
Break even point = Fixed costs/CM Ratio
=(110,000+75,000)/24.33% = $760,378.13
6. Commercial Division = 66,000/37% = $178,378.38
Residential = 44,000/18% = $244,444.44
7.Commercial = (66,000+19,000)/42% = $202,380.95
Residential = (44,000+38,000)/23% = $356,521.74