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 $ 750,000 $ 250,000 $ 500,000 Cost of goods sold 500,000 140,000 360,000 Gross margin 250,000 110,000 140,000 Selling and administrative expenses 240,000 104,000 136,000 Net operating income $ 10,000 $ 6,000 $ 4,000 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 $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $38,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $55,000 of fixed expenses that would be avoided if the Commericial segment is dropped.

Required: 1. Do you agree with the intern’s decision to use an absorption format for her segmented income statement? Yes or No

2-a. Based on the intern’s segmented income statement, can you determine how she allocated the company’s common fixed expenses to the Commercial and Residential segments?

2-b. Do you agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments? Yes or No

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

4. 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.)

5. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division. (Round CM ratio to 2 decimal places and final answer to the nearest whole dollar amount.)

6. 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. (Round CM ratio to 2 decimal places and final answer to the nearest whole dollar amount.)

Explanation / Answer

Ans 1 Yes absorption format can be used for her segment statement. In this fixed overhead is absobed into the segment cot When segmenting an income statement, using the absorption costing principle common fixed costs across all profit centers are allocated to absorbed bythe profit centers Absorption costing gives contribution and segment margin for each segment which can be used in evaluationf the profiyability of each segment Ans 2 a She allocated common fixed exepnse on the basis of sales ehich is in the ratio of 1:2( 250000:500000) for commercial and residential respectively Commercial=72000/3*1 $24,000 Residential=72000/3*2 $48,000 Ans 2b Yes, I agree with the decision because it is logical to allocate fixed cost on the basis of sales , as this is the best way to allocate selling and administrative expenses Ans 3 Particulkars Commercial Residential Total Sales $250,000 500000 $750,000 Cost of good sold 140000 360000 $500,000 Selling & Administrative Expenses-Fixed $25,000.0 $50,000.0 $75,000.0 Contribution $85,000 $90,000 $175,000 Fixed expense Traceble $55,000.0 $38,000.0 $93,000 Segment margin $30,000.0 $52,000.0 $82,000 Common Fixed Expense 72000 Allocated common fixed Cost 24000 48000 Net Operationg Income $6,000 $4,000 $10,000 Ans 4 Breakeven in $=Fixed Cost/Contribution Margin per unit= 165000/.233 707143 $ ans Contribution margin per unit=175000/750000 0.233

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