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	$	795,000		$	265,000		$	530,000
Cost of goods sold		535,300			148,400			386,900
Gross margin		259,700			116,600			143,100
Selling and administrative expenses		252,000			110,000			142,000
Net operating income	$	7,700		$	6,600		$	1,100

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 $82,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $56,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $34,000 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 $14,000 and $28,000, 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.

PLEASE SHOW ALL UR WORK ON HOW U FOUND THE ANSWERS

Answer 1

Solution 1:
No, the intern’s decision to use an absorption format for her segmented income statement is not a good idea because because if break even is to be calculated then contribution format should be used rather than absorption format.
Solution 2a:
	Commercial	Residential
Total Selling and administrative expenses	110000	142000
Less: Direct fixed expesnes	56000	34000
Less: variable Sales Commission (10% of sales)	26500	53000
Common Fixed expesnes allocated to Segments	27500	55000
Solution 2b:
	Commercial	Residential	Total
Total Sales	265000	530000	795000
Ratio	0.33	0.67
Common Fixed expesnes allocated to Segments	27500	55000	82500
Ratio	0.33	0.67
Hence, Allocation is based on Sales. Option "a = Sales" is correct.
Solution 3:
No, we don’t agree with the intern’s decision to allocate common fixed expesnes because theses expenses does not directly related to segments.
Solution 4:
Segmented Income Statement (Using contribution format)
	Total	Commercial	Residential
Sales	795000	265000	530000
Variable expenses:
Cost of goods sold	535300	148400	386900
Sales commissions	79500	26500	53000
Total Variable expenses	614800	174900	439900
Contribution margin	180200	90100	90100
Less: Direct Fixed Expesnes	90000	56000	34000
Segment Margin	90200	34100	56100
Less: Common fixed expenses	82500
Net Operating Income	7700
Solution 5:
Companywide Break even point in dollar sales
	Total
Total Contribution margin	180200
/Total Sales	795000
Contribution Margin ratio	22.667%
Total Companywide Fixed Costs (90000+82500)	172500
/Contribution Margin ratio	22.667%
Companywide Break even point in dollar sales	761028
Solution 6:
Segment's Break even point in dollar sales
	Commercial	Residential
Segments Contribution margin	90100	90100
/Segment's Sales	265000	530000
Contribution Margin ratio	34.00%	17.00%
Direct Fixed Costs	56000	34000
/Contribution Margin ratio	34.00%	17.00%
Segment's Break even point in dollar sales	164706	200000
Solution 7:
Segment's Revised Break even point in dollar sales
	Commercial	Residential
Sales	265000	530000
Variable expenses:
Cost of goods sold	148400	386900
revised Sales commissions	13250	26500
Total Variable expenses	161650	413400
Contribution margin	103350	116600
Revised Contribution Margin ratio	39.00%	22.00%
Revised Direct Fixed Expesnes	70000	62000
/Contribution Margin ratio	39.00%	22.00%
Segment's Break even point in dollar sales	179487	281818