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: 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. (Round intermediate calculations to 3 decimal places and final answer to the nearest whole dollar amount.)6. 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 answer to the nearest whole dollar amount.)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.(Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.) *** Questions 1, 2, 3 & 4 were previously answered, so if you could please respond to 5,6 & 7. Please show as much detail on calculations as possible. Thank you!

Answer 1

Dear student, we cannot able to post solution more than four sub parts of question as per our policy.

Answer 1
Do you agree with the intern’s decision to use an absorption format for her segmented income statement?
No because For Decision making of breakeven analysis Contribution format for her segmented income statement is useful.
Answer 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?
	Commercial	Residential	Total
Selling and administrative expenses	122,000	154,000
Less: 10% commission on sales	29,500	59,000
Less: Segment Traceable fixed expenses	68,000	46,000
company’s common fixed expenses did she allocate	24,500	49,000	73,500
Which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments
Sales.
Option A is correct
Answer 3
Do you agree with the intern’s decision to allocate the common fixed expenses to the Commercial and Residential segments?
No. because for decision making purpose common fixed cost should not allocated to Department wise or Product wise.
Answer 4
segmented income statement using the contribution format
	Total Company	Commercial	Residential
Sales	885,000	295,000	590,000
Less: variable cost
Cost of goods sold	572,300	153,400	418,900
Sales commissions	88,500	29,500	59,000
Total variable expenses	660,800	182,900	477,900
Contribution margin	224,200	112,100	112,100
fixed expenses - Traceable	114,000	68,000	46,000
Segment margin	110,200	44,100	66,100
fixed expenses - Common	73,500
Net operating income	36,700