Question

Problem 6-24A Companywide and Segment Break-Even Analysis; Decision Making [LO6-4, LO6-5]

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	$	1,005,000		$	335,000		$	670,000
Cost of goods sold		670,000			180,900			489,100
Gross margin		335,000			154,100			180,900
Selling and administrative expenses		308,000			138,000			170,000
Net operating income	$	27,000		$	16,100		$	10,900

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 $61,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $62,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $84,000 of fixed expenses that would be avoided if the Commericial segment is dropped.

Required:

1.	Do you agree with the intern’s decision to use an absorption format for her segmented income statement?
	Yes No

2-a.	Based on the intern’s segmented income statement, can you determine how she allocated the company’s common fixed expenses to the Commercial and Residential segments?

         

2-b.	Do you agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments?
	Yes No

3.	Redo the intern’s segmented income statement using the contribution format.

         

4.	Compute the companywide break-even point in dollar sales? (Round intermediate calculations to 3 decimal places and final answer to the nearest whole dollar amount.)

         

5.	Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division. (Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.)

         

6.

Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $14,500 and $29,000, 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. (Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.)

         

Problem 6-24A Companywide and Segment Break-Even Analysis; Decision Making [LO6-4, LO6-5] 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 $ 1,005,000 $ 335,000 $ 670,000 Cost of goods sold 670,000 180,900 489,100 Gross margin 335,000 154,100 180,900 Selling and administrative expenses 308,000 138,000 170,000 Net operating income $ 27,000 $ 16,100 $ 10,900 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 $61,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $62,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $84,000 of fixed expenses that would be avoided if the Commericial segment is dropped. Required: 1. Do you agree with the intern’s decision to use an absorption format for her segmented income statement? Yes No 2-a. Based on the intern’s segmented income statement, can you determine how she allocated the company’s common fixed expenses to the Commercial and Residential segments? 2-b. Do you agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments? Yes No 3. Redo the intern’s segmented income statement using the contribution format. 4. Compute the companywide break-even point in dollar sales? (Round intermediate calculations to 3 decimal places and final answer to the nearest whole dollar amount.) 5. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division. (Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.) 6. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $14,500 and $29,000, 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. (Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.)

Answer 1

1)	No.
2-a)	Selling and administrative expenses:	Total	Commercial	Residential
	Common fixed expenses	61500
	Segmental fixed expenses = 62000+84000 =	146000
	Sales commission	100500
	Total	308000
	Allocation:
	Total allocated		138000	170000
	Less:
	Segmental fixed expenses		84000	62000
	Sales commission		33500	67000
	Allocated common fixed expenses		20500	41000
	Ratio		1.00	2.00
	Ratio of sales		1.00	2.00
	Answer:
	The common fixed expenses have been allocated in the ratio of sales.
2-b)	No.
3)	SGMENTED INCOME STATEMENT-CONTRIBUTION FORMAT
		Total	Commercial	Residential
	Sales	1005000	335000	670000
	Variable expenses:
	Cost of goods sold	670000	180900	489100
	Sales commission	100500	33500	67000
	Total variable expenses	770500	214400	556100
	Contribution margin	234500	120600	113900
	Segmental fixed costs	146000	62000	84000
	Segmental operating income	88500	58600	29900
	Common fixed expenses	61500
	Overall net income	27000
4)	Company wide break even point in dollar sales = Total fixed costs/Overall CM Ratio
	= (146000+61500)/(234500/1005000) =	$        8,89,286
5)	Break even point in dollar sales:
	Fixed costs		62000	84000
	CM Ratio		0.36	0.17
	Break even point in dollar sales = Fixed costs/CM Ratio =		$        1,72,222	$      4,94,118
6)	The contribution format setmental income statement can be revised as below:
		Total	Commercial	Residential
	Sales	1005000	335000	670000
	Variable expenses:
	Cost of goods sold	670000	180900	489100
	Sales commission	50250	16750	33500
	Total variable expenses	720250	197650	522600
	Contribution margin	284750	137350	147400
	Salaries	43500	14500	29000
	Segmental fixed costs	146000	62000	84000
	Segmental operating income	95250	60850	34400
	Common fixed expenses	61500
	Overall net income	33750
	Break even point in dollar sales:
	Fixed costs		76500	113000
	CM Ratio		0.41	0.22
	Break even point in dollar sales = Fixed costs/CM Ratio =		$        1,86,585	$      5,13,636