Using the scenario provided, your textbook, and at least oneoutside source discuss whether you agree with the intern’s decisionto use an absorption format for her segmented income statement andher decision to allocate the common fixed expenses to theCommercial and Residential segments? Why or why not? Write incomplete sentences and included proper APA citations for each ofyour sources used in your post.
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 | $750,000 | $250,000 | $500,000 |
Cost of goods sold | 500,000 | 140,000 | ?? 360,000 |
Gross margin | 250,000 | 110,000 | 140,000 |
Selling and administrativeexpenses | 240,000 | 104,000 | 136,000 |
Net operating income | $ 10,000 | $ 6,000 | $??? 4,000 |
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 $72,000 of common fixed expenses that would continue to beincurred even if the Commercial or Residential segments arediscontinued, $55,000 of fixed expenses that would be avoided ifthe Commercial segment is dropped, and $38,000 of fixed expensesthat would be avoided if the Residential segment is dropped.
