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	$	765,000		$	255,000		$	510,000
Cost of goods sold		510,000			142,800			367,200
Gross margin		255,000			112,200			142,800
Selling and administrative expenses		244,000			106,000			138,000
Net operating income	$	11,000		$	6,200		$	4,800

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 $85,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $52,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $30,000 of fixed expenses that would be avoided if the Residential segment is dropped.

7. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $12,000 and $24,000, 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

	Total	Commercial	Residential
Total selling and administrative expense (a)	$   244,000	$     106,000	$   138,000
Traceable fixed expenses	82,000	52,000	30,000
Sales commissions (10% of sales)	76,500	25,500	51,000
Selling and administrative expenses accounted for (b)	158,500	77,500	81,000
Common fixed expenses (a) – (b)	$     85,500	$       28,500	$     57,000
	Total	Commercial	Residential
	Company
Sales	$765,000	$255,000	$510,000
Variable expenses:
Cost of goods sold	510,000	142,800	367,200
Sales commissions (10%)	76,500	25,500	51,000
Total variable expenses	586,500	168,300	418,200
Contribution margin	178,500	86,700	91,800
Traceable fixed expenses	82,000	52,000	30,000
Segment margin	96,500	34,700	61,800
Common fixed expenses	85,500
Net operating income	11,000
New Contrbution format income statement
	Total	Commercial	Residential
	Company
Sales	$765,000	$255,000	$510,000
Variable expenses:
Cost of goods sold	510,000	142,800	367,200
Sales commissions (10%)	38,250	12,750	25,500
Total variable expenses	548,250	155,550	392,700
Contribution margin	216,750	99,450	117,300
Traceable fixed expenses	118,000	64,000	54,000
Segment margin	98,750	35,450	63,300
Common fixed expenses	85,500
Net operating income	13,250
Contribution %(99450/255000; 117300/510000)		39.00%	23.00%
Dollar sales for a segment to break even - Commercial	=	Segment traceable fixed expenses
		Segment CM ratio
	=	$64,000
		0.39
	=	$164,103 (rounded)
Dollar sales for a segment to break even - Residential	=	Segment traceable fixed expenses
		Segment CM ratio
	=	$54,000
		0.23
	=	$234,783 (rounded)