Question

Crossfire Company segments its business into two regions—East and West. The company prepared a contribution format segmented income statement as shown below:

	Total Company			East			West
Sales	$	930,000		$	620,000		$	310,000
Variable expenses		744,000			514,600			229,400
Contribution margin		186,000			105,400			80,600
Traceable fixed expenses		116,000			51,000			65,000
Segment margin		70,000		$	54,400		$	15,600
Common fixed expenses		62,000
Net operating income	$	8,000

Required:

1. Compute the companywide break-even point in dollar sales.

2. Compute the break-even point in dollar sales for the East region.

3. Compute the break-even point in dollar sales for the West region.

4. Prepare a new segmented income statement based on the break-even dollar sales that you computed in requirements 2 and 3. Use the same format as shown above. What is Crossfire’s net operating income (loss) in your new segmented income statement?

5. Do you think that Crossfire should allocate its common fixed expenses to the East and West regions when computing the break-even points for each region?

Answer 1

Answer to Requirement 1:

Companywide contribution margin ratio = Contribution margin / Sales
Companywide contribution margin ratio = $186,000 / $930,000
Companywide contribution margin ratio = 20%

Companywide fixed expenses = Traceable fixed expenses + Common fixed expenses
Companywide fixed expenses = $116,000 + $62,000
Companywide fixed expenses = $178,000

Companywide breakeven point in dollar sales = Companywide fixed expenses / Companywide contribution margin ratio
Companywide breakeven point in dollar sales = $178,000 / 0.20
Companywide breakeven point in dollar sales = $890,000

Answer to Requirement 2:

Contribution margin ratio = Contribution margin / Sales
Contribution margin ratio = $105,400 / $620,000
Contribution margin ratio = 17%

Breakeven point in dollar sales = Traceable fixed expenses / Contribution margin ratio
Breakeven point in dollar sales = $51,000 / 0.17
Breakeven point in dollar sales = $300,000

Answer to Requirement 3:

Contribution margin ratio = Contribution margin / Sales
Contribution margin ratio = $80,600 / $310,000
Contribution margin ratio = 26%

Breakeven point in dollar sales = Traceable fixed expenses / Contribution margin ratio
Breakeven point in dollar sales = $65,000 / 0.26
Breakeven point in dollar sales = $250,000

Answer to Requirement 4:

Answer to Requirement 5:

No, Crossfire should not allocate its common fixed expenses as these costs are not traceable to any product and does not affect any decision at regional level.