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:

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 $66,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $78,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $56,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

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 $25,000 and $50,000, 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.

Total
Company Commercial Residential Sales $ 960,000 $ 320,000 $ 640,000 Cost of goods sold 636,800 169,600 467,200 Gross margin 323,200 150,400 172,800 Selling and administrative expenses 296,000 132,000 164,000 Net operating income $ 27,200 $ 18,400 $ 8,800

Explanation / Answer

5. Company's Break-even Point in dollars

CM Ratio = $227,200 / $960,000 = 0.2367 or 23.67%

Total Fixed Cost = $134,000 + $66,000 = $200,000

Break even Point = $200,000 / 0.2367 = $844,951

6. Break-even Point in dollar sales for the commercial division and for the residential division

7. Break-even point with reduced commission

Fixed Cost :

Commercial = $78,000 + $25,000 = $103,000

Residential = $56,000 + $50,000 = $106,000

CM Ratio:

Commercial = ($118,400 + $16,000) / $320,000 =0.42

Residential = ($108,800 + $32,000) / $640,000 = 0.22

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Income Statement Total Company Commercial Residential Sales $960,000 $320,000 $640,000 Variable expenses: Cost of goods sold $636,800 $169,600 $467,200 Sales Commission $96,000 $32,000 $64,000 Total Variable expenses $732,800 $201,600 $531,200 Contribution Margin $227,200 $118,400 $108,800 Traceable Fixed expenses $134,000 $78,000 $56,000 Segment Margin $93,200 $40,400 $52,800 Common Fixed expenses $66,000 Net Operating Income $27,200

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