Toxaway Company is a merchandiser that segments its businessinto two divisions—Commercial and Residential. The company’saccounting intern was asked to prepare segmented income statementsthat the company’s divisional managers could use to calculate theirbreak-even points and make decisions. She took the prior month’scompanywide income statement and prepared the absorption formatsegmented income statement shown below:
| Total
Company | Commercial | Residential |
| Sales | $ | 1,020,000 | | $ | 340,000 | | $ | 680,000 | |
| Cost of goods sold | | 669,800 | | | 180,200 | | | 489,600 | |
| Gross margin | | 350,200 | | | 159,800 | | | 190,400 | |
| Selling and administrative expenses | | 312,000 | | | 140,000 | | | 172,000 | |
| Net operating income | $ | 38,200 | | $ | 19,800 | | $ | 18,400 | |
|
In preparing these statements, the intern determined thatToxaway’s only variable selling and administrative expense is a 10%sales commission on all sales. The company’s total fixed expensesinclude $60,000 of common fixed expenses that would continue to beincurred even if the Commercial or Residential segments arediscontinued, $86,000 of fixed expenses that would be avoided ifthe Commericial segment is dropped, and $64,000 of fixed expensesthat would be avoided if the Residential segment is dropped.
Required:
1. Do you agree with the intern’s decision to use an absorptionformat for her segmented income statement?
2. Based on a review of the intern’s segmented incomestatement:
a. How much of the company’s common fixed expenses did sheallocate to the Commercial and Residential segments?
b. Which of the following three allocation bases did she mostlikely used to allocate common fixed expenses to the Commercial andResidential segments: (a) sales, (b) cost of goods sold, or (c)gross margin?
3. Do you agree with the intern’s decision to allocate thecommon fixed expenses to the Commercial and Residentialsegments?
4. Redo the intern’s segmented income statement using thecontribution format.
5. Compute the companywide break-even point in dollar sales.
6. Compute the break-even point in dollar sales for theCommercial Division and for the Residential Division.
7. Assume the company decided to pay its sales representativesin the Commercial and Residential Divisions a total monthly salaryof $15,500 and $31,000, respectively, and to lower its companywidesales commission percentage from 10% to 5%. Calculate the newbreak-even point in dollar sales for the Commercial Division andthe Residential Division.
