Reference no: EM132659556

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:

                                                                          Total Company                 Commercial                  Residential

Sales                                                    $885,000                       $295,000                          $590,000

Cost of goods sold                                 572,300                          153,400                              418,900

Gross margin                                          312,700                      141,600                                   171,100

Selling and administrative expenses             276,000                         122,000                                 154,000

Net operating income                               $36,700                           $19,600                                   $17,100

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 $73,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $68,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $46,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

Problem 1. Do you agree with the intern's decision to use an absorption format for her segmented income statement?

Problem 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?

Problem 3. Do you agree with the intern's decision to allocate the common fixed expenses to the Commercial and Residential segments?

Problem 4. Redo the intern's segmented income statement using the contribution format.

Problem 5. Compute the companywide break-even point in dollar sales.

Problem 6. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

Problem 7. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $20,000 and $40,000, 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.