Question

In: Accounting

Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...

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 $ 750,000 $ 250,000 $ 500,000
Cost of goods sold 500,000 140,000 360,000
Gross margin 250,000 110,000 140,000
Selling and administrative expenses 240,000 104,000 136,000
Net operating income $ 10,000 $ 6,000 $ 4,000

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 $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $38,000 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 $15,000 and $30,000, 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.

Solutions

Expert Solution

Solution 1:
No, the intern’s decision to use an absorption format for her segmented income statement is not a good idea because because if break even is to be calculated then contribution format should be used rather than absorption format.
Solution 2a:
Commercial Residential
Total Selling and administrative expenses 104000 136000
Less: Direct fixed expesnes 55000 38000
Less: variable Sales Commission (10% of sales) 25000 50000
Common Fixed expesnes allocated to Segments 24000 48000
Solution 2b:
Commercial Residential Total
Total Sales 250000 500000 750000
Ratio 0.33 0.67
Common Fixed expesnes allocated to Segments 24000 48000 72000
Ratio 0.33 0.67
Hence, Allocation is based on Sales. Option "a = Sales" is correct.
Solution 3:
No, we don’t agree with the intern’s decision to allocate common fixed expesnes because theses expenses does not directly related to segments.
Solution 4:
Segmented Income Statement (Using contribution format)
Total Commercial Residential
Sales 750000 250000 500000
Variable expenses:
Cost of goods sold 500000 140000 360000
Sales commissions 75000 25000 50000
Total Variable expenses 575000 165000 410000
Contribution margin 175000 85000 90000
Less: Direct Fixed Expesnes 93000 55000 38000
Segment Margin 82000 30000 52000
Less: Common fixed expenses 72000
Net Operating Income 10000
Solution 5:
Companywide Break even point in dollar sales
Total
Total Contribution margin 175000
/Total Sales 750000
Contribution Margin ratio 23.333%
Total Companywide Fixed Costs (86000+84000) 165000
/Contribution Margin ratio 23.333%
Companywide Break even point in dollar sales 707144
Solution 6:
Segment's Break even point in dollar sales
Commercial Residential
Segments Contribution margin 85000 90000
/Segment's Sales 250000 500000
Contribution Margin ratio 34.00% 18.00%
Direct Fixed Costs 55000 38000
/Contribution Margin ratio 34.00% 18.00%
Segment's Break even point in dollar sales 161765 211111
Solution 7:
Segment's Revised Break even point in dollar sales
Commercial Residential
Sales 250000 500000
Variable expenses:
Cost of goods sold 140000 360000
revised Sales commissions 12500 25000
Total Variable expenses 152500 385000
Contribution margin 97500 115000
Revised Contribution Margin ratio 39.00% 23.00%
Revised Direct Fixed Expesnes 70000 68000
/Contribution Margin ratio 39.00% 23.00%
Segment's Break even point in dollar sales 179487 295652

Related Solutions

Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 960,000 $ 320,000 $ 640,000 Cost of goods sold 636,800 169,600 467,200 Gross margin 323,200 150,400...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 1,050,000 $ 350,000 $ 700,000 Cost of goods sold 682,500 178,500 504,000 Gross margin 367,500 171,500...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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   $   945,000      $   315,000      $   630,000   Cost of goods sold      630,000          ...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 885,000 $ 295,000 $ 590,000 Cost of goods sold 572,300 153,400 418,900 Gross margin 312,700 141,600...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 885,000 $ 295,000 $ 590,000 Cost of goods sold 572,300 153,400 418,900 Gross margin 312,700 141,600...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 900,000 $ 300,000 $ 600,000 Cost of goods sold 579,000 153,000 426,000 Gross margin 321,000 147,000...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 870,000 $ 290,000 $ 580,000 Cost of goods sold 571,300 153,700 417,600 Gross margin 298,700 136,300...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 810,000 $ 270,000 $ 540,000 Cost of goods sold 548,100 153,900 394,200 Gross margin 261,900 116,100...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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...
Toxaway Company is a merchandiser that segments its business into two divisions—Commercial and Residential. The company’s...
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 $ 1,020,000 $ 340,000 $ 680,000 Cost of goods sold 669,800 180,200 489,600 Gross margin 350,200 159,800...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT