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	$	1,020,000		$	680,000		$	340,000
Variable expenses		765,000			544,000			221,000
Contribution margin		255,000			136,000			119,000
Traceable fixed expenses		156,000			58,000			98,000
Segment margin		99,000		$	78,000		$	21,000
Common fixed expenses		65,000
Net operating income	$	34,000

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

Break-even point : A break even point is the point at which the sales exactly covers its expenses

1	Companywide break even point= Fixed costs /Contribution margin
		221000/255000
		884000.00

2	Break even point for east region = Fixed costs / Contribution margin for east region
		58000/136000*680000
		290000

3	Break even point for west region=Fixed costs/ Contribution margin for west region
		98000/119000*340000
		280000

4

Segmented Income statement
	Total company	East	West
Sales	570,000	290000	280000
Variable expenses	765000	544000	221000
Contribution margin	-195000	-254000	59000
Traceable fixed costs	156000	58000	98000
Segment margin	-351000	-312000	-39000
Common fixed Expenses	65000
Net operating income	-416000

The net operating loss at the breakeven point for the east and west region is 416000

5. Yes the company should allocate the common fixed expenses to the east and west region when computing break even point for each region, as the allocation would result in an increase in the amount of break even sales for each region. This will ultimately increase the amount of segment margin for east and west region.