Toxaway Company is a merchandiser that segments its business into two divisions—
ID: 2425211 • Letter: T
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:
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 $70,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $50,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $72,000 of fixed expenses that would be avoided if the Commericial segment is dropped.
Do you agree with the intern’s decision to use an absorption format for her segmented income statement?
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?
Do you agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments?
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.)
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 answers to the nearest whole dollar amount.)
Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $22,000 and $44,000, 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 answers to the nearest whole dollar amount.)
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:
Explanation / Answer
1
No, we do not agree with the intern’s decision to use an absorption format for her segmented income statement, because it will not show the separate contribution earned by each segment.
2-a.
Determination of method used for allocation of the company’s common fixed expenses:
Total Company
Commercial
Residential
Total Selling and administrative expenses
$ 284,000
$ 126,000
$ 158,000
Less: Variable selling and administrative expenses = 10% of sales =
$ (91,500)
$ (30,500)
$ (61,000)
(305000*10%)
(610000*10%)
Total Fixed Selling and administrative expenses
$ 192,500
$ 95,500
$ 97,000
Less: Traceable segment fixed expenses
$ (122,000)
$ (72,000)
$ (50,000)
Company’s common fixed expenses Allocation
$ 70,500
$ 23,500
$ 47,000
2-b.
No, we do not agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments, because the common fixed expenses should be shown in total for company and should not be allocated amongst segments.
3
Segmented income statement using the contribution format:
Total Company
Commercial
Residential
Sales
$ 915,000
$ 305,000
$ 610,000
Less: Cost of goods sold
$ (585,600)
$ (152,500)
$ (433,100)
Gross margin
$ 329,400
$ 152,500
$ 176,900
Less: Variable selling and Administrative Expenses
$ (91,500)
$ (30,500)
$ (61,000)
Contribution Margin
$ 237,900
$ 122,000
$ 115,900
Less: Traceable segment fixed expenses
$ (122,000)
$ (72,000)
$ (50,000)
Segment Margin
$ 115,900
$ 50,000
$ 65,900
Less: Common Fixed Expenses
$ (70,500)
Net operating income
$ 45,400
1
No, we do not agree with the intern’s decision to use an absorption format for her segmented income statement, because it will not show the separate contribution earned by each segment.
2-a.
Determination of method used for allocation of the company’s common fixed expenses:
Total Company
Commercial
Residential
Total Selling and administrative expenses
$ 284,000
$ 126,000
$ 158,000
Less: Variable selling and administrative expenses = 10% of sales =
$ (91,500)
$ (30,500)
$ (61,000)
(305000*10%)
(610000*10%)
Total Fixed Selling and administrative expenses
$ 192,500
$ 95,500
$ 97,000
Less: Traceable segment fixed expenses
$ (122,000)
$ (72,000)
$ (50,000)
Company’s common fixed expenses Allocation
$ 70,500
$ 23,500
$ 47,000
2-b.
No, we do not agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments, because the common fixed expenses should be shown in total for company and should not be allocated amongst segments.
3
Segmented income statement using the contribution format:
Total Company
Commercial
Residential
Sales
$ 915,000
$ 305,000
$ 610,000
Less: Cost of goods sold
$ (585,600)
$ (152,500)
$ (433,100)
Gross margin
$ 329,400
$ 152,500
$ 176,900
Less: Variable selling and Administrative Expenses
$ (91,500)
$ (30,500)
$ (61,000)
Contribution Margin
$ 237,900
$ 122,000
$ 115,900
Less: Traceable segment fixed expenses
$ (122,000)
$ (72,000)
$ (50,000)
Segment Margin
$ 115,900
$ 50,000
$ 65,900
Less: Common Fixed Expenses
$ (70,500)
Net operating income
$ 45,400
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