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	$	990,000		$	330,000		$	660,000
Cost of goods sold		663,300			181,500			481,800
Gross margin		326,700			148,500			178,200
Selling and administrative expenses		304,000			136,000			168,000
Net operating income	$	22,700		$	12,500		$	10,200

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 $63,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $82,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $60,000 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.

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 $13,500 and $27,000, 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.

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	Commercial Division Residential Division Break-even point

	Commercial	Residential
Common fixed expenses

Based on a review of the intern’s segmented income statement, which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments?

	Salesradio button unchecked1 of 3 Cost of goods soldradio button unchecked2 of 3 Gross marginradio button unchecked3 of 3

Do you agree with the intern’s decision to allocate the common fixed expenses to the Commercial and Residential segments?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

Redo the intern’s segmented income statement using the contribution format.

	Toxaway Company Income Statement Total Company Commercial Residential Variable expenses: Total variable expenses

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.)

	Break-even point

	Commercial Division	Residential Division
Break-even point Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $13,500 and $27,000, 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.) Show less Commercial Division Residential Division Break-even point

Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $13,500 and $27,000, 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.)

Show less

	Commercial Division Residential Division Break-even point

Answer 1

• All working forms part of the answer
• Solution is provided as asked
• All Amounts are in $
• Answer 1

Absorption format should not be used for segmented income statement as it does not provide the true correct picture. Hence, I do not agree with intern’s decision.

• Answer 2

‘a’

	Commercial	Residential	Total
Sales	330000	660000	990000
10% of sales as sales commission	33000	66000	99000
Traceable fixed expenses	82000	60000	142000
Total (B)	115000	126000	241000
Selling & Adm Exp (A)	136000	168000	304000
Selling & Adm exp allocated (A-B)	21000	42000	63000

‘b’

Intern has used ‘Sales’ figure to allocate $63000 of common fixed expense, this is proved below:

	Commercial	Residential	Total
Common fixed expenses allocated	21000	42000	63000
Sales	330000	660000	990000
Ratio of Sales	0.333333333	0.666666667	1
Common fixed expenses if allocated on the basis of above ratio (=same as allocated by intern)	21000	42000	63000

• Answer 3: No I don’t agree. Common fixed expenses should not be allocated. Only traceable fixed expenses need to be allocated.
• Answer 4: Contribution format

	Commercial	Residential	Total
Sales	330000	660000	990000
(-) Variable cost:
Cost of Goods Sold	181500	481800	663300
Sales Commission	33000	66000	99000
Total variable cost	214500	547800	762300
Contribution margin	115500	112200	227700
(-) Traceable fixed expenses	82000	60000	142000
Product margin	33500	52200	85700
(-) Common fixed expenses			63000
Net Income			22700

• Answer 5: Company Wide Break Even

	Commercial	Residential	Total
Contribution margin	115500	112200	227700
Sales	330000	660000	990000
Contribution margin ratio	0.35	0.17	0.23
Sales Mix	0.333333	0.666667
Weighted average contribution margin	0.116667	0.113333	0.23
Total fixed expenses	205000
Weighted average contribution margin	0.23
Company wide Break even point in dollar sales	$891304.3

• Answer 6: Break Even point for divisions

	Commercial	Residential
Traceable fixed expenses	82000	60000
Contribution margin ratio	0.35	0.17
Break Even point in sales dollars	234285.7	352941.2

• Answer 7: Sales commission is reduced, and fixed expenses increased

	Commercial	Residential	Total
Sales	330000	660000	990000
(-) Variable cost:
Cost of Goods Sold	181500	481800	663300
Sales Commission	16500	33000	49500
Total variable cost	198000	514800	712800
Contribution margin	132000	145200	277200
(-) Traceable fixed expenses	95500	87000	182500
Product margin	36500	58200	94700
(-) Common fixed expenses			63000
Net Income			31700
	Commercial	Residential	Total
Contribution margin	132000	145200
Sales	330000	660000
Contribution margin ratio (B)	0.4	0.22
Fixed expenses (A)	95500	87000
Break Even point in sales dollars (A/B)	238750	395454.5