Toxaway Company is a merchandiser that segments its business into two divisions—

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 $ 810,000 $ 270,000 $ 540,000 Cost of goods sold 548,100 153,900 394,200 Gross margin 261,900 116,100 145,800 Selling and administrative expenses 256,000 112,000 144,000 Net operating income $ 5,900 $ 4,100 $ 1,800 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 $81,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $58,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $36,000 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 $15,000 and $30,000, 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.

Explanation / Answer

1. NO

Contribution format should be used for segmented income statement.

2a. Company's common fixed expenses allocated to segments:

2b. Allocation base used for allocating common fixed expenses: (a) Sales

Commercial: $270000/$810000 x $81000 = $27000

Residential: $540000/$810000 x $81000 = $54000

3. NO

4.

Per Chegg guidelines, first 4 sub-parts have been answered.

Commercial Residential Total Selling and administrative expenses 112000 144000 Less variable sales commission (10% of sales) 27000 54000 Less direct fixed expenses 58000 36000 Common fixed expenses allocated to segment 27000 54000 81000

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