Reference no: EM132527968

                                                                 Total company                    Commercial                Residential

sales                                                  750000                            250000                     500000

cost of goods sold                                 500000                            140000                    360000

gross margin                                        250000                              110000                  140000

selling and administrative expenses             240000                            104000                     136000

net operating income                              10000                                 6000                           4000

• In preparing these statements, the intern determined that Baxter and Holmes' only variable selling and administrative expense is a 10% sales commission on all sales. The company's total fixed expenses include $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses would be avoided if the Residential segment is dropped.

Question 1. Do you agree with the intern's decision to use an absorption format for her segmental income statement? Explain why you agree or disagree.

Question 2. In preparing the segmented income statement, the intern allocated the common fixed expenses to the Commercial and Residential segments. Do you agree with the intern's decision to allocate the common fixed costs to the two divisions? Explain why you agree or disagree