Problem 6-24 Companywide and Segment Break-Even Analysis;Decision Making [LO6-4, LO6-5] Toxaway Company is a merchandiserthat segments its business into two divisions—Commercial andResidential. The company’s accounting intern was asked to preparesegmented income statements that the company’s divisional managerscould use to calculate their break-even points and make decisions.She took the prior month’s companywide income statement andprepared the absorption format segmented income statement shownbelow:
Total Company Commercial Residential Sales $ 840,000 $ 280,000 $560,000 Cost of goods sold 557,200 154,000 403,200 Gross margin282,800 126,000 156,800 Selling and administrative expenses 264,000116,000 148,000 Net operating income $ 18,800 $ 10,000 $ 8,800 Inpreparing these statements, the intern determined that Toxaway’sonly variable selling and administrative expense is a 10% salescommission on all sales. The company’s total fixed expenses include$78,000 of common fixed expenses that would continue to be incurredeven if the Commercial or Residential segments are discontinued,$62,000 of fixed expenses that would be avoided if the Commercialsegment is dropped, and $40,000 of fixed expenses that would beavoided if the Residential segment is dropped. Required: 1. Do youagree with the intern’s decision to use an absorption format forher segmented income statement? 2. Based on a review of theintern’s segmented income statement. a. How much of the company’scommon fixed expenses did she allocate to the Commercial andResidential segments? b. Which of the following three allocationbases did she most likely used to allocate common fixed expenses tothe Commercial and Residential segments: (a) sales, (b) cost ofgoods sold, or (c) gross margin? 3. Do you agree with the intern’sdecision to allocate the common fixed expenses to the Commercialand Residential segments? 4. Redo the intern’s segmented incomestatement using the contribution format. 5. Compute the companywidebreak-even point in dollar sales. 6. Compute the break-even pointin dollar sales for the Commercial Division and for the ResidentialDivision. 7. Assume the company decided to pay its salesrepresentatives in the Commercial and Residential Divisions a totalmonthly salary of $17,000 and $34,000, respectively, and to lowerits companywide sales commission percentage from 10% to 5%.Calculate the new break-even point in dollar sales for theCommercial Division and the Residential Division.
