Toxaway Company Is a merchandiser that segments its business Into two divislons-
ID: 2552038 • Letter: T
Question
Toxaway Company Is a merchandiser that segments its business Into two divislons-Commerclal and Resldential. The company's accounting Intern was asked to prepare segmented Income statements that the company's divsional 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 Cost of goods sold Gross margin Selling and administrative expenses Net operating income $ 825,8e0 275,ee 55e,808 481,588 148,588 146,888 $9,508 7,ee2,5e8 555,588 269,588 26e,888 154,888 121,888 114,808 In preparing these statements, the intern determined that Toxaway's only variable selling and administrative expense is a 10% sales commisslon on all sales. The company's total fixed expenses Include $79,500 of common fixed expenses that would continue to be Incurred even if the Commerclal or Residential segments are discontinued, $60,000 of fixed expenses that would be avolded If the Commericlal segment is dropped, and $38,000 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 Commerclal and Residential segments? b. Which of the following three allocation bases did she most lkely 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 companywlde break-even point In dollar sales. 6. Compute the break-even polnt In dollar sales for the Commercial DIvIsIon and for the Residential DIvislon. 7. Assume the company decided to pay Its sales representatives In the Commercial and Residential Divisions a total monthly salary of $16,000 and $32,000, respectively, and to lower its companywide sales commission percentage from 10% to 5%. Calculate the new break-even point In dollar sales for the Commercial DIvislon and the Residential DIvislon. Complete this question by entering your answers in the tabs below Req 1 Req 2A Req 2B Req 3 Req 4 Req 5 Req 6 Req 7 Compute the companywide break-even point in dollar sales. (Round intermediate calculations to 3 decimal places and final answer to the nearest whole dollar amount.) reak-evenExplanation / Answer
1.I do not agree with her decision because most of the fixed cost is unavoidable in nature. And it should treat as the period cost. So variable costing will be most appropriate in this case.
2.b Sales will be the most appropriate because the cost of goods sold only includes Variable cost and Gross Margin cant be taken as decision-making parameter. As no other information’s are provided it's Better to take sales as the Basis to distribute Common Cost.
2.a
Commercial ($)
Residential 94)
Total ($)
Sales
275,000
550,000
825,000
Common Fixed Cost Allocated
26,500
53,000
795,000
Portion of fixed Cost = total fixed cost*( Department Sales/Total Sales)
3. I don’t agree to allocate the common fixed cost to this two products Because the fixed cost is not avoidable by the company by stopping the product. So it's better to treat it as organizations cost and Deduct it from the total operating profit of the company that Method will provide the more accurate result for the company.
4.Income Statement
Commercial($)
Residential ($)
Total ($)
Sales (A)
275,000
550,000
825,000
Variable Portion of Cost of Goods Sold
67,500
310,500
378000
Variable selling Cost
114,000
146,000
260,000
Total Variable Cost(B)
181,500
456,500
638,000
Contribution Margin C=(A-B)
93,500
93,500
187,000
Avoidable Fixed Cost
60,000
38,000
98,000
Common Fixed Cost
26,500
53,000
79,500
Total Fixed Cost (D)
86,500
91,000
177,500
Net Profit (E =C-D)
7000
2500
9500
5. Companies Break -even point
Contribution Margin Ratio = Contribution Margin /Sales =$187,000/$825,000= .22
Company Break even sales in Dollar
Total fixed cost /Contribution Margin Ratio =$177,500/.22 = $806,818
6.
Commercial ($)
Residential ($)
Sales
275,000
550000
Contribution Margin
93,500
93500
Contribution margin Ratio
0.34
0.17
Fixed Cost
86,500
91,000
Break even Revenue
254,411
535,294
7. Income Statement
Commercial ($)
Residential ($)
Sales (A)
275,000
550,000
Variable Portion of Cost of Good Sold
67,500
310,500
Variable selling Cost
13,750
27,500
Total Variable Cost (B)
81,250
338,000
Contribution Margin (C=A-B)
193,750
212,000
Avoidable Fixed Cost
60,000
38,000
Common Fixed Cost
26,500
53,000
Salary to Sales Man
16,000
32,000
Total Fixed Cost (D)
102,500
123,000
Net Profit (E =C-D)
91,250
89,000
Commercial ($)
Residential ($)
Sales
275,000
550,000
Contribution Margin
193,750
212,000
Contribution margin Ratio
0.70
0.38
Fixed Cost
102,500
123,000
Break even Revenue
146,428
323,684
Commercial ($)
Residential 94)
Total ($)
Sales
275,000
550,000
825,000
Common Fixed Cost Allocated
26,500
53,000
795,000
Portion of fixed Cost = total fixed cost*( Department Sales/Total Sales)
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