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 $67,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $54,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $76,000 of fixed expenses that would be avoided if the Commericial segment is dropped.

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?

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

Toxaway Company

Variable Costing Income Statement

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. Do not consider the CM ratio in percentages.)

Beak even point in dollar sales:

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. Do not consider the CM ratio in percentages.)

Commerical division Residential division

Break even point in dollar sales

Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $24,000 and $48,000, 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. Do not consider the CM ratio in percentages.)

Commerical division Residential division

Break even point in dollar sales

Total Company Commercial Residential Sales $ 945,000 $ 315,000 $ 630,000 Cost of goods sold 630,000 170,100 459,900 Gross margin 315,000 144,900 170,100 Selling and administrative expenses 292,000 130,000 162,000 Net operating income $ 23,000 $ 14,900 $ 8,100

Explanation / Answer

Commercial Residential Total Sales 315000 630000 945000 Total SG & A epenses 130000 162000 292000 Commissions 31500 63000 94500 Balance 98500 99000 197500 Specific fixed expenses 76000 54000 130000 Common fixed expenses 22500 45000 67500 Company wide break even sales (dollars)   = Fixed Costs / Contribution margin = 846550 Commecial Residential Specific fixed costs 76000 54000 Contribution margin 36% 17% Break even sales 211111 317647 Toxaway Company Variable costing income statement Total Commercial Residential Amount % Amount % Amount % Sales 945000 100.00% 315000 100.00% 630000 100.00% Cost of goods sold 630000 66.67% 170100 54.00% 459900 73.00% Gross contribution margin 315000 33.33% 144900 46.00% 170100 27.00% Commissions (5%) 47250 5.00% 15750 5.00% 31500 5.00% Contribution margin 267750 28.33% 129150 41.00% 138600 22.00% Specific Fixed costs 202000 21.38% 100000 31.75% 102000 16.19% Net operating income 65750 29150 36600 Common fixed costs 67500 Net operating income -1750 Commissions are 5% of sales. Specific fixed costs will be   : Commecrial = 76,000 + 24,000 = 100,000 : Residential = 54,000 +48,000 = 102,000 Company wide break even sales (dollars)   = Fixed Costs / Contribution margin = 951288 Commecial Residential Specific fixed costs 100000 102000 Contribution margin 41.00% 22.00% Break even sales 243902 463636

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