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	$	1,040,000		$	650,000		$	390,000
Variable expenses		676,000			442,000			234,000
Contribution margin		364,000			208,000			156,000
Traceable fixed expenses		148,000			64,000			84,000
Segment margin		216,000		$	144,000		$	72,000
Common fixed expenses		76,000
Net operating income	$	140,000

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.

(Round intermediate calculations to 2 decimal places)

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?

Yes or No

Answer 1

Answer 1.

Company:

Sales = $1,040,000
Contribution Margin = $364,000

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $364,000 / $1,040,000
Contribution Margin Ratio = 35%

Fixed Costs = Traceable Fixed Expenses + Common Fixed Expenses
Fixed Costs = $148,000 + $76,000
Fixed Costs = $224,000

Breakeven Point in dollar sales = Fixed Costs / Contribution Margin Ratio
Breakeven Point in dollar sales = $224,000 / 35%
Breakeven Point in dollar sales = $640,000

Answer 2.

East Region:

Sales = $650,000
Contribution Margin = $208,000

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $208,000 / $650,000
Contribution Margin Ratio = 32%

Breakeven Point in dollar sales = Traceable Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $64,000 / 32%
Breakeven Point in dollar sales = $200,000

Answer 3.

West Region:

Sales = $390,000
Contribution Margin = $156,000

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $156,000 / $390,000
Contribution Margin Ratio = 40%

Breakeven Point in dollar sales = Traceable Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $84,000 / 40%
Breakeven Point in dollar sales = $210,000

Answer 4.

Answer 5.

No, Common fixed expenses should not allocated to operating regions as these costs are not affected by decisions made by these regions