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 Commercial Residential $ 345,000 Company $1,035,000 $ 690,000 Sales 676,200 358,800 316,000 Cost of goods sold Gross margin Selling and administrative expenses 179,400 496,800 165,600 142,000 $ 23,600 193,200 174,000 $ 19,200 42,800 Net operating income 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 $58,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $88,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $66,000 of fixed expenses that would be avoided if the Residential segment is dropped.

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Answer 1

1.No, do not agree
2.a.
Allocation of common expenses is as follows
	Commercial	Residential
Selling and Admin Expenses	142,000	174,000
Less: Sales Commission	34,500	69,000
Less: Traceable fixed expenses	88,000	66,000
Common Expenses Allocated	19,500	39,000
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	1,035,000	345,000	690,000
Less: Variable Expenses
Cost of Goods Sold	676,200	179,400	496,800
Selling and Admin Expenses	103,500	34,500	69,000
Contribution Margin	255,300	131,100	124,200
Less: Traceable Fixed Expenses	154,000	88,000	66,000
Segment Margin	101,300	43,100	58,200
Less: Common Fixed Expenses	58,500
Net Operating Income	42,800
5.Contribution Margin Ratio = Contribution Margin/Sales
=255300/1035000=24.67%
Break even point = Fixed costs/CM Ratio
=(154,000+58500)/24.67% = $861,370.09
6. Commercial Division = 88,000/38% = $231,578.95
Residential = 66,000/18% = $366,666.67
7.Commercial = (88000+16500)/43% = $243,023.26
Residential = (66,000+33,000)/23% = $430,434.78