Question

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			171,100
Selling and administrative expenses		276,000			122,000			154,000
Net operating income	$	36,700		$	19,600		$	17,100

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 $73,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $68,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $46,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

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?

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 $20,000 and $40,000, 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.

Answer 1

2a.

Company's common fixed expenses allocated to segments:
	Commercial	Residential	Total
Selling and administrative expenses	122000	154000
Less variable sales commission (10% on sales)	29500	59000
Less traceable fixed expenses	68000	46000
Common fixed expenses $	24500	49000	73500

4.

Toxaway Company
Contribution Format Income Statement
	Total Company	Commercial	Residential
Sales	885000	295000	590000
Variable expenses:
Cost of goods sold	572300	153400	418900
Sales commissions	88500	29500	59000
Total variable expenses	660800	182900	477900
Contribution margin	224200	112100	112100
Traceable fixed expenses	114000	68000	46000
Segment margin	110200	44100	66100
Common fixed expenses	73500
Net operating income	36700

5.

Companywide break-even point = Total fixed expenses/Contribution margin ratio

Total fixed expenses = $114000 + $73500 = $187500

Contribution margin ratio = Contribution/Sales = $224200/$885000 = 25.33%

Break-even point = $187500/25.33% = $740229

6.

Break-even point:

Commercial division: $68000/38% = $178947

Contribution margin ratio = $112100/$295000 = 38%

Residential division: $46000/19% = $242105

Contribution margin ratio = $112100/$590000 = 19%

7.

	Commercial	Residential
Traceable fixed expenses	68000	46000
Sales representatives' salaries	20000	40000
Total fixed expenses	88000	86000
Sales	295000	590000
Variable expenses:
Cost of goods sold	153400	418900
Sales commissions (5%)	14750	29500
Total variable expenses	168150	448400
Contribution margin	126850	141600
Contribution margin ratio	43.00%	24.00%
Break-even point $	204651	358333
	($88000/43%)	($86000/24%)