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 Sale 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 administrative expresses 240,000 104,000 136,000 Net operating income 10,000 6,000 4,000 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 $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 that would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses that would be avoided if the Residential segment is dropped. Required: Do you agree with the intern’s decision to use an absorption format for her segmented income statement? Why? Based on a review of the intern’s segmented income statement: How much of the company’s common fixed expenses did she allocate to the Commercial and Residential segments? Which of the following three allocation bases did she most likely use to allocate common fixed expenses to the Commercial and Residential segments: (a) sales, (b) cost of goods sold, or (c) gross margin?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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
Sale	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 administrative expresses	240,000	104,000	136,000
Net operating income	10,000	6,000	4,000

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 $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 that would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

Do you agree with the intern’s decision to use an absorption format for her segmented income statement? Why?
Based on a review of the intern’s segmented income statement:
How much of the company’s common fixed expenses did she allocate to the Commercial and Residential segments?
Which of the following three allocation bases did she most likely use to allocate common fixed expenses to the Commercial and Residential segments: (a) sales, (b) cost of goods sold, or (c) gross margin?
Do you agree with the intern’s decision to allocate the common fixed expenses to the Commercial and Residential segments? Why?
Redo the intern’s segmented income statement using the contribution format.
Compute the companywide break-even point in dollar sales.
Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.
Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $15,000 and $30,000, 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.

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