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	$	870,000		$	290,000		$	580,000
Cost of goods sold		571,300			153,700			417,600
Gross margin		298,700			136,300			162,400
Selling and administrative expenses		272,000			120,000			152,000
Net operating income	$	26,700		$	16,300		$	10,400

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 $75,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $66,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $44,000 of fixed expenses that would be avoided if the Residential segment is dropped.

1) Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

2) Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $19,000 and $38,000, 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

1.No, do not agree
2.a.
Allocation of common expenses is as follows
	Commercial	Residential
Selling and Admin Expenses	120,000	152,000
Less: Sales Commission	29,000	58,000
Less: Traceable fixed expenses	66,000	44,000
Common Expenses Allocated	25,000	50,000
b.Sales, is used since expenses allocated in the ratio of 1:2
3.No, Since common expenses are unavoidable
4.Contribution Margin format Income Statement
	Total	Commercial	Residential
Sales	870,000	290,000	580,000
Less: Variable Expenses
Cost of Goods Sold	571,300	153,700	417,600
Selling and Admin Expenses	87,000	29,000	58,000
Contribution Margin	211,700	107,300	104,400
Less: Traceable Fixed Expenses	110,000	66,000	44,000
Segment Margin	101,700	41,300	60,400
Less: Common Fixed Expenses	75,000
Net Operating Income	26,700
5.Contribution Margin Ratio = Contribution Margin/Sales
=211,700/870,000 = 24.33%
Break even point = Fixed costs/CM Ratio
=(110,000+75,000)/24.33% = $760,378.13
6. Commercial Division = 66,000/37% = $178,378.38
Residential = 44,000/18% = $244,444.44
7.Commercial = (66,000+19,000)/42% = $202,380.95
Residential = (44,000+38,000)/23% = $356,521.74