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	$	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?

Answer 1

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...