Toxaway Company is a merchandiser that segments its business into two divisions-
ID: 2575994 • Letter: T
Question
Toxaway Company is a merchandiser that segments its business into two divisions-Commercial and Residential. The companys 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 otal CompanyCommercial Residential 670,8e0 489.10e $1,ee5,000 $335,800 Sales Cost of goods sold Gross sargin selling and adeinistrative expenses38,699130170,e00 Net operating incone 180,900 154,100 335,900 188,9e0 $ 27,000 $16,10 1e,90 in preparing these statements, the intern determined that Toxaway's only variable selling and administrative expenses a 10% sales commission on all sales. The company's total fixed expenses include $61,500 of common fixed expenses that would continue to be s Incurred even if the Commercial or Residential segments are discontinued, $84,000 of fixed expenses that would be avoided if the Commenicial segment is dropped, and $62000 of fixed expenses that would be avolded if the Residential segment is dropped Required: 1 Do you agree with the intern's decsion 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 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 and Residential segments? 7. Assume the company decided to pay its sales representatives in the Commercial and Residential DMsions a total monthly salary of $14.500 and $29,000, respectively, andto lower ts company de sales co n sson percentage from 10% to 5% Calculate the new break-even polnt in dollar sales for the Commercial Dvision and the Residential DivisionExplanation / Answer
Break up of the selling & administrative expenses
Company
Commercial
Residential
Variable Selling Commissions (10% of sales)
$ 33,500
$ 67,000
$ 100,500
Traceable selling & admin fixed expense
$ 84,000
$ 62,000
$ 146,000
Common fixed expense allocated
(138000 - 33500-84000)
$ 20,500
$ 20,500
(170000 - 67000-62000)
$ 41,000
$ 41,000
Total Selling & Admin Expense
$ 138,000
$ 170,000
$ 308,000
1) No. Its is better to use the segmented contribution format income statement to get a view of the contribution that is being made by each segment to the common fixed cost of the company and to get a clear view of the profitability of each segment.
2)
a) $61500
b) In the ratio of Sales.
For example
Common fixed expense allocated to Commercial = 61500 x (335000/1005000) = $20500
3) It is always tough to find the most equitable basis for the allocation of common fixed expense on some equitable basis. Usually the allocation is based on the assumption that the common fixed expense has been mostly influenced by the basis of allocation chosen to allocate the fixed expense. For example here the sales revenue has been used as the allocation base. But, common fixed expenses are also influenced by several activities of the organization and there is no one factor like sales, direct labor hours etc. which will allocate the common fixed expenses to the products equitable. Because of the limitations of this system, the allocation of common fixed expense usually gives distorted performance report for each segment. That is why it is better to use the contribution format of segment reporting for a better outlook of the segmental profitability and performance and for a better decision making.
4)
Sales
$ 1,005,000
$ 335,000
$ 670,000
Less: Variable expenses
Cost of goods sold
$ 670,000
$ 180,900
$ 489,100
selling & admin expense
$ 100,500
$ 33,500
$ 67,000
Contribution
$ 234,500
$ 120,600
$ 113,900
Less: Avoidable Fixed cost
$ 146,000
$ 84,000
$ 62,000
Segmental operating income
$ 88,500
$ 36,600
$ 51,900
Common fixed expense
$ 61,500
Profit for the company
$ 27,000
5)
PV ratio for the company = ($234500 / $1005000) = 0.2333
BEP in dollar sales = ($146000+$61500) / 0.2333 = $889413
6)
PV ratio for the Commercial = (120600/335000) =0.36
BEP in dollar sales = (84000 / 0.36) = $233333
PV ratio for Residential = (113900 / 670000) = 0.17
BEP in dollar sales = (62000 / 0.17) = $364706
7)
Sales
$ 1,005,000
$ 335,000
$ 670,000
Less: Variable expenses
Cost of goods sold
$ 670,000
$ 180,900
$ 489,100
selling & admin expense
$ 50,250
$ 16,750
$ 33,500
Contribution
$ 284,750
$ 137,350
$ 147,400
Less: Avoidable Fixed cost
$ 189,500
$ 98,500
$ 91,000
Segmental operating income
$ 95,250
$ 38,850
$ 56,400
Common fixed expense
$ 61,500
Profit for the company
$ 33,750
PV ratio for the Commercial = (137350/335000) =0.41
BEP in dollar sales = (98500 / 0.41) = $240244
PV ratio for Residential = (147400 / 670000) = 0.22
BEP in dollar sales = (91000/0.22) = $413636
Break up of the selling & administrative expenses
Company
Commercial
Residential
Variable Selling Commissions (10% of sales)
$ 33,500
$ 67,000
$ 100,500
Traceable selling & admin fixed expense
$ 84,000
$ 62,000
$ 146,000
Common fixed expense allocated
(138000 - 33500-84000)
$ 20,500
$ 20,500
(170000 - 67000-62000)
$ 41,000
$ 41,000
Total Selling & Admin Expense
$ 138,000
$ 170,000
$ 308,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.