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	$	960,000		$	320,000		$	640,000
Cost of goods sold		636,800			169,600			467,200
Gross margin		323,200			150,400			172,800
Selling and administrative expenses		296,000			132,000			164,000
Net operating income	$	27,200		$	18,400		$	8,800

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 $66,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $78,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $56,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

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 $25,000 and $50,000, 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

Income Statement

	Total Company	Commercial	Residential
Sales	$960,000	$320,000	$640,000
Variable expenses:
Cost of goods sold	$636,800	$169,600	$467,200
Sales Commission	$96,000	$32,000	$64,000
Total Variable expenses	$732,800	$201,600	$531,200
Contribution Margin	$227,200	$118,400	$108,800
Traceable Fixed expenses	$134,000	$78,000	$56,000
Segment Margin	$93,200	$40,400	$52,800
Common Fixed expenses	$66,000
Net Operating Income	$27,200

5. Company's Break-even Point in dollars

CM Ratio = $227,200 / $960,000 = 0.2367 or 23.67%

Total Fixed Cost = $134,000 + $66,000 = $200,000

Break even Point = $200,000 / 0.2367 = $844,951

6. Break-even Point in dollar sales for the commercial division and for the residential division

	Commercial	Residential
Fixed Cost	$78,000	$56,000
CM Ratio	0.37	0.17
Break-even point	$210,811	$329,412

7. Break-even point with reduced commission

	Commercial	Residential
Fixed Cost	$103,000	$106,000
CM Ratio	0.42	0.22
Break-even point	$245,238	$481,818

Fixed Cost :

Commercial = $78,000 + $25,000 = $103,000

Residential = $56,000 + $50,000 = $106,000

CM Ratio:

Commercial = ($118,400 + $16,000) / $320,000 =0.42

Residential = ($108,800 + $32,000) / $640,000 = 0.22

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