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.

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?

Answer 1

Solution SEGMENTED INCOME STATEMENT Total Company Commercial Residential Sales Variable expenses: $330,000 $660,000 000 066$ $663,300 $481,800 $181,500 Cost of Goods sold Sales commission (10% of sales) $99,000 $33,000 $66,000 Total variable expenses Contribution margin Traceable fixed expenses: $762,300 $214,500 $547,800 $112,200 $227,700 $115,500 Selling and administrative expenses $142,000 $82,000 $60,000 Total traceable fixed expenses Divisional segment margin $142,000 $82,000 $33,500 $60,000 $52,200 $85,700 Common fixed expenses $63,000 Net operating income (loss) $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: Common fixed expenses allocated to the segments by the intern Commercial Residential Total Selling and administrative expenses $136,000 $168,000 allocated by the intern Less: Traceable expenses Sales commission (10 % of sales) Traceable fixed expenses ($66,000) ($60,000) ($33,000) (S82,000) Common fixed expenses allocated by the intern to the segments $42,000 $21,000