Question

In: Accounting

Crossfire Company segments its business into two regions—East and West. The company prepared a contribution format...

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 $ 750,000 $ 500,000 $ 250,000
Variable expenses 525,000 375,000 150,000
Contribution margin 225,000 125,000 100,000
Traceable fixed expenses 140,000 60,000 80,000
Segment margin 85,000 $ 65,000 $ 20,000
Common fixed expenses 70,000
Net operating income $ 15,000

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?

Solutions

Expert Solution

PART 1: COMPANY WIDE BREAK-EVEN POINT IN DOLLAR SALES

Break-even Sales = Fixed Cost / Contribution Margin ratio

Contribution Margin ratio = Contribution Margin / Sales * 100

Contribution Margin ratio = $225,000 / 750,000 * 100 = 30%

Fixed cost = Traceable Fixed expenses + Common Fixed expenses

                   = $140,000 + $70,000

                   = $210,000

Break-even Sales = $210,000 / 30% = $700,000

PART 2: EAST REGION BREAK-EVEN POINT IN DOLLAR SALES

Break-even Sales = Fixed Cost / Contribution Margin ratio

Contribution Margin ratio = Contribution Margin / Sales * 100

Contribution Margin ratio = $125,000 / 500,000 * 100 = 25%

Fixed Cost = $60,000

Break-even Sales = $60,000 / 25% = $240,000

PART 3: WEST REGION BREAK-EVEN POINT IN DOLLAR SALES

Break-even Sales = Fixed Cost / Contribution Margin ratio

Contribution Margin ratio = Contribution Margin / Sales * 100

Contribution Margin ratio = $100,000 / 250,000 * 100 = 40%

Fixed Cost = $80,000

Break-even Sales = $80,000 / 40% = $200,000

PART 4: SEGMENTED INCOME STATEMENT

Working Notes:

East Region Variable expenses = $240,000 * (100% - 25%) = $180,000

West Region Variable expenses = $200,000 * (100% - 40%) = $120,000

Total Variable expenses = $180,000 + $120,000 = $300,000

PART 5:

No, Crossfire should not allocate its common fixed expenses to the East and West region while computing Break even point for each region.

All the best...


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