Toxaway Company is a merchandiser that segments its business into two divisions—
ID: 2538033 • 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 $63,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $82,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $60,000 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 $13,500 and $27,000, 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.
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Common fixed expenses
Based on a review of the intern’s segmented income statement, which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments?
Do you agree with the intern’s decision to allocate the common fixed expenses to the Commercial and Residential segments?
Redo the intern’s segmented income statement using the contribution format.
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.)
Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $13,500 and $27,000, 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.)
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Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $13,500 and $27,000, 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.)
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TotalCompany Commercial Residential Sales $ 990,000 $ 330,000 $ 660,000 Cost of goods sold 663,300 181,500 481,800 Gross margin 326,700 148,500 178,200 Selling and administrative expenses 304,000 136,000 168,000 Net operating income $ 22,700 $ 12,500 $ 10,200
Explanation / Answer
Answer
Absorption format should not be used for segmented income statement as it does not provide the true correct picture. Hence, I do not agree with intern’s decision.
‘a’
Commercial
Residential
Total
Sales
330000
660000
990000
10% of sales as sales commission
33000
66000
99000
Traceable fixed expenses
82000
60000
142000
Total (B)
115000
126000
241000
Selling & Adm Exp (A)
136000
168000
304000
Selling & Adm exp allocated (A-B)
21000
42000
63000
‘b’
Intern has used ‘Sales’ figure to allocate $63000 of common fixed expense, this is proved below:
Commercial
Residential
Total
Common fixed expenses allocated
21000
42000
63000
Sales
330000
660000
990000
Ratio of Sales
0.333333333
0.666666667
1
Common fixed expenses if allocated on the basis of above ratio (=same as allocated by intern)
21000
42000
63000
Commercial
Residential
Total
Sales
330000
660000
990000
(-) Variable cost:
Cost of Goods Sold
181500
481800
663300
Sales Commission
33000
66000
99000
Total variable cost
214500
547800
762300
Contribution margin
115500
112200
227700
(-) Traceable fixed expenses
82000
60000
142000
Product margin
33500
52200
85700
(-) Common fixed expenses
63000
Net Income
22700
Commercial
Residential
Total
Contribution margin
115500
112200
227700
Sales
330000
660000
990000
Contribution margin ratio
0.35
0.17
0.23
Sales Mix
0.333333
0.666667
Weighted average contribution margin
0.116667
0.113333
0.23
Total fixed expenses
205000
Weighted average contribution margin
0.23
Company wide Break even point in dollar sales
$891304.3
Commercial
Residential
Traceable fixed expenses
82000
60000
Contribution margin ratio
0.35
0.17
Break Even point in sales dollars
234285.7
352941.2
Commercial
Residential
Total
Sales
330000
660000
990000
(-) Variable cost:
Cost of Goods Sold
181500
481800
663300
Sales Commission
16500
33000
49500
Total variable cost
198000
514800
712800
Contribution margin
132000
145200
277200
(-) Traceable fixed expenses
95500
87000
182500
Product margin
36500
58200
94700
(-) Common fixed expenses
63000
Net Income
31700
Commercial
Residential
Total
Contribution margin
132000
145200
Sales
330000
660000
Contribution margin ratio (B)
0.4
0.22
Fixed expenses (A)
95500
87000
Break Even point in sales dollars (A/B)
238750
395454.5
Commercial
Residential
Total
Sales
330000
660000
990000
10% of sales as sales commission
33000
66000
99000
Traceable fixed expenses
82000
60000
142000
Total (B)
115000
126000
241000
Selling & Adm Exp (A)
136000
168000
304000
Selling & Adm exp allocated (A-B)
21000
42000
63000
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