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	$	1,050,000		$	350,000		$	700,000
Cost of goods sold		682,500			178,500			504,000
Gross margin		367,500			171,500			196,000
Selling and administrative expenses		320,000			144,000			176,000
Net operating income	$	47,500		$	27,500		$	20,000

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 $57,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $90,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $68,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

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

2. Compute the companywide break-even point in dollar sales.

3. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

4. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $17,500 and $35,000, 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

1. Contribution Margin Income Statement
Taxway Company
Income Statement (Contribution Margin Format)
	Commercial	Residential	Total
Sales	$         350,000	$       700,000	$         1,050,000
Less: Variable Cost:
Cost of Goods Sold:	$       (178,500)	$     (504,000)	$          (682,500)
Var. Sell. & Admin. Exp.	$         (35,000)	$       (70,000)	$          (105,000)
Contribution Margin	$       136,500	$     126,000	$          262,500
Less: Traceable Fixed Exp.	$          90,000	$        68,000	$            158,000
Segment Margin	$          46,500	$        58,000	$            104,500
Less: Common Fixed Expense	$                 -	$               -	$              57,000
Net Operating Income			$              47,500
	3. Commercial & Residential		2.Companywide
CM Ratio = CM ÷ Sales	136,500/350,000	126,000/700,000	262,500/1,05,0000
	39%	18%	25%
B.E.P. = (Total Fixed Cost ÷ CMR)	$ 90,000 ÷ 0.39	$68,000 ÷ 0.18	215,000 ÷ 0.25
2 &3. Break-Even-Point:	$       230,769	$     377,778	$          860,000

4. When Company pays $17,500 and $35,000 fixed monthly salaries and only 5% commission on sales that is

for Commercial $17,500 and Residential $35,000.

New Contribution Margin for Commercial segment = $350,000 - $178,500 -$17,500= $154,000

New Contribution Margin for Residential segment = $700,000 - $504,000 -$35,000= $161,000

New CM Ratio Com. Segment = $154,000 ÷ $350,0000 = 0.44

New CM Ratio Res. Segment = $161,000 ÷ $700,0000 = 0.23

New Total Fixed Cost for Com. Segment = $90,000 + 17,500 =$107,500

New Total Fixed Cost for Res. Segment = $68,000 + 35,000 = $103,000

New B.E.P for Com. Segment = New Total Fixed Cost ÷ CM Ratio = $107,500 ÷ 0.44 = $244,318

New B.E.P for Res. Segment = New Total Fixed Cost ÷ CM Ratio = $103,000 ÷ 0.23 = $447,826