undefined Solution Answer 1: To determine: Whether absorption costing method should be used for segmented income statement Solution: Under absorption costing the fixed expenses get deferred to next period due to absorption in closing stock even though they have actually been incurred. As such, profit/loss shown by Absorption costing is not real profit. Hence, variable costing should be used. Answer 2 (a) To determine: Allocation of Common Fixed Costs Solution: Particulars Total Company Commercial Residential Actual Selling expenses $ 240,000 $ 104,000 $ 136,000 Less: Variable Selling expenses $ (75,000) $ (25,000) $ (50,000) Less: Traceable fixed selling expenses $ (93,000) $ (55,000) $ (38,000) Balance fixed expenses $ 72,000 $ 24,000 $ 48,000 (common fixed expenses allocated) Explanation: Total selling and administrative expenses are given. These are a sum total of variable selling expenses + traceable fixed selling expenses + common allocated fixed selling expenses; Variable selling expenses are given as % of sales and have been computed accordingly in above working note; Traceable fixed selling expenses are given in the question; Balance remaining after deducting variable selling and traceable fixed expenses will give common fixed expenses allocated. Given Variable Sales commission % as 10% Sales traceable fixed selling expenses Formula Variable Selling Expenses = Sales X Variable Sales Commission % Common Allocated Fixed Expenses = Actual Selling Expenses - Variable Selling Expenses - Traceable Fixed Selling Expense Calculation Total Variable Sales Commission = $ 750,000 × 10% = $ 75,000 Total Variable Sales Commission of Commercial= $ 250,000 × 10% = $ 25,000 Total Variable Sales Commission of Residential= $ 500,000 × 10% = $ 50,000 Conclusion: The common fixed cost has been allocated as $ 24,000 to Commercial and $ 48,000 to Residential Answer 2 (b) To determine: Allocation basis of common fixed cost out of given options: Solution: In order to evaluate what basis has been used, we will compute the ratio under all the options and then assess as under: Company Commercial Residential Common Fixed Expenses allocated (as per answer 2(a)) $ 72,000 $ 24,000 $ 48,000 Ratio of Common Fixed Expenses allocated 33% 67% Sales $ 750,000 $ 250,000 $ 500,000 Ratio of Sales 33% 67% Cost of Goods Sold $ 500,000 $ 140,000 $ 360,000 Ratio of Cost of Goods Sold 28% 72% Gross Margin $ 250,000 $ 110,000 $ 140,000 Ratio of Gross Margin 44% 56% As clear from above, the intern used Sales Ratio to distribute common fixed expenses. Explanation: The ratio of individual common allocated fixed expenses to total common fixed expenses works out to 33% and 67% for Commercial and Residential respectively. The ratio of individual sales to total sales also works out to 33% and 67% for Commercial and Residential respectively. As such, sales ratio has been used for allocating common fixed expenses. Conclusion: Sales ratio has been used to distribute common expenses Answer 3: To determine: Whether fixed common expenses should be allocated to segments Solution: Fixed Common Expenses should not be allocated to segments Explanation: Given : Intern has allocated common expenses on the basis of sales to both the segments Explanation: It is not advisable to allocate common fixed costs to segments for evaluating the segment's profitability. These costs would get incurred whether segment exists or not. As such, they make a segment look less profitable and hence should be excluded while evaluating segment wise profitability. However, while deciding whether to continue or drop a segment these costs need to be considered. Conclusion: In view of reflecting true segment margin, fixed common expenses should not be allocated to segment. Answer 4: In contribution format, details are shown in the following sequence: Sales, Total Variable cost, contribution margin, total fixed cost, Net operating Income To determine: Segmented Income Statement in Contribution Format Solution (a): Toxaway Company Income statement (contribution format) Total Company Commercial Residential Sales $ 750,000 $ 250,000 $ 500,000 Cost of Goods Sold $ 500,000 $ 140,000 $ 360,000 Variable selling and administrative expenses $ 75,000 $ 25,000 $ 50,000 Contribution Margin $ 175,000 $ 85,000 $ 90,000 Fixed Expenses $ 165,000 $ 79,000 $ 86,000 Net Operating Income $ 10,000 $ 6,000 $ 4,000 Explanation: Given: Sales and Cost of Goods Sold are given in the question Variable selling and administrative expenses and fixed expenses have been computed in above solutions Formula: Contribution Margin = Sales - Cost of Goods Sold - Variable Selling and Administrative Expenses Net Operating income = Contribution Margin - Fixed Expenses Calculation: Contribution Margin of Company = $ 750,000 - $ 500,000 - $ 75,000 = $ 175,000 Contribution Margin of Commercial = $ 250,000 - $ 140,000 - $ 25,000 = $ 85,000 Contribution Margin of Residential = $ 500,000 - $ 360,000 - $ 50,000 = $ 90,000 Net Operating Income of Company = $ 175,000 - $ 165,000 = $ 10,000 Net Operating Income of Commercial = $ 85,000 - $ 79,000 = $ 6,000 Net Operating Income of Residential = $ 90,000 - $ 86,000 = $ 4,000 Conclusion: Net Operating Income for Company is $ 10,000 and for Commercial and Residential segment is $ 6,000 and $ 4,000 respectively. Answer 5: Breakeven point is that level of sales at which the Company is at a No profit no loss situation. This means that the company is able to fully recover its variable cost and fixed cost but nothing above that. To determine: Breakeven point in dollar Sales Solution: Break-even point in dollar Sales = $ 707,243 Explanation: Break-even point is computed to calculate the minimum sales that must be achieved to arrive at a no profit no loss situation; Break-even point in unit sales is calculated by dividing the Fixed cost with contribution per unit Break-even point in dollar sales is calculated by dividing the Fixed cost with contribution Margin % Contribution Margin is the ratio of Contribution to Sale value. Given: Fixed Cost has been computed as $ 165,000 Sales is given as $ 175,000 Contribution margin has been computed as $ 175,000 Formula: Contribution Margin % = Contribution Margin Sales Break-even Point in Dollar Sales = Fixed Cost Contribution Margin % Calculation: Contribution Margin % = $ 175,000 $ 750,000 = 23.33 % Break-even Point in Dollar Sales = $ 165,000 33 .33 % = $ 707 , 243 Conclusion: Toxaway Company will have to make a minimum sale of $ 707,243 to be able to fully recover its variable as well as fixed cost. Answer 6: To determine: Breakeven point in dollar sales for Commercial and Residential division. Solution: Break-even point in dollar Sales = Fixed Cost/ Contribution Margin % Commercial Residential Fixed Cost (A) $ 79,000 $ 86,000 Contribution Margin (B) $ 85,000 $ 90,000 Sales (C) $ 250,000 $ 500,000 Contribution Margin % (D = B / C) 34% 18% Break even point (A / D) $ 232,353 $ 477,778 Explanation: Given Fixed cost has been computed in above solutions Sales is given in the question Formula Contribution Margin % = Contribution Margin Sales Break-even Point in Dollar Sales = Fixed Cost Contribution Margin % Calculation Contribution Margin % of Commercial = $ 85,000 $ 250,000 = 34 % Contribution Margin % of Residential = $ 90,000 $ 500,000 = 18 % Break-even Point in Dollar Sales of Commercial= $ 79,000 34 % = $ 232 , 353 Break-even Point in Dollar Sales of Residential= $ 86,000 18 % = $ 477 , 778 Conclusion: Commercial will have to make a minimum sale of $ 232,353 to be able to fully recover its variable as well as fixed cost. Similarly, Residential will have to make a minimum sales of $ 477,778 Answer 7: To determine: Break-even point in dollar sales: Solution: Commercial Residential Sales (A) 250,000 500,000 Cost of Goods Sold (B) 140,000 360,000 Variable selling and administrative expenses (5% of sales) (C) 12,500 25,000 Contribution Margin (D = A-B-C) 97,500 115,000 Fixed Expenses (E) 94,000 116,000 Contribution Margin % (F = D / A) 39% 23% Break even point (E / F) 241,026 504,348 Explanation: Given: Additional fixed cost is given as $ 15,000 for Commercial and $ 30,000 for Residential. Variable selling and administrative expenses have been given as 5% of Sales Cost of Goods Sold is given as $ 140,000 and $ 360,000 for Commercial and Residential respectively Formula: Variable Selling & Administrative Expenses = Sales X New Sales Commission % Contribution Margin = Sales - Cost of Goods Sold -Variable Selling & Administrative Expenses Contribution Margin % = Contribution Margin Sales New Fixed Cost = Old Fixed Cost + Additional Fixed Cost Break-even Point in Dollar Sales = Fixed Cost Contribution Margin % Calculation: Variable Selling & Administrative Expenses for Commercial= $ 250,000 X 5% = $ 12,500 Variable Selling & Administrative Expenses for Residential= $ 500,000 X 5% = $ 25,000 Contribution Margin of Commercial = $ 250,000 - $ 140,000 - $ 12,500 = $ 97,500 Contribution Margin of Residential = $ 500,000 - $ 360,000 - $ 25,000 = $ 115,000 Contribution Margin % of Commercial= $ 97,500 $ 250,000 = 39 % Contribution Margin % of Residential= $ 115,000 $ 500,000 = 23 % New Fixed Cost of Commercial = $ 79,000 + $ 15,000 = $ 94,000 New Fixed Cost of Resindetial = $ 86,000 + $ 30,000 = $ 116,000 Break-even Point in Dollar Sales of Commercial = $ 94,000 39 % = $ 241 , 026 Break-even Point in Dollar Sales of Residential = $ 116,000 23 % = $ 504 , 348 Conclusion: New Break-even point of Commercial is $ 241,026; New Break-even point of Residential is $ 504,348

15th Edition

ISBN: 9780078025631

Author: Ray H Garrison, Eric Noreen, Peter C. Brewer Professor

Publisher: McGraw-Hill Education

See similar textbooks

Videos

Expert Solution & Answer

Chapter 6 Solutions

Managerial Accounting

Ch. 6.A - Prob. 1E Ch. 6.A - EXERCISE 6A-2 Super-Variable Costing and Variable...Ch. 6.A - Prob. 3E Ch. 6.A - PROBLEM 6A-4 Super-Variable Costing and Variable...Ch. 6.A - Prob. 5P Ch. 6 - Prob. 1Q Ch. 6 - Are selling and administrative expenses treated as...Ch. 6 - Explain how fixed manufacturing overhead costs are...Ch. 6 - What are the arguments in favor of treating fixed...Ch. 6 - What are the arguments in favor of treating fixed...

Ch. 6 - Prob. 6Q Ch. 6 - Prob. 7Q Ch. 6 - Prob. 8Q Ch. 6 - Under absorption costing, how is it possible to...Ch. 6 - Prob. 10Q Ch. 6 - Prob. 11Q Ch. 6 - What costs are assigned to a segment under the...Ch. 6 - Distinguish between a trace able fixed cost and a...Ch. 6 - Explain how the contribution margin differs from...Ch. 6 - Prob. 15Q Ch. 6 - Prob. 16Q Ch. 6 - Should a company allocate its common feed costs to...Ch. 6 - A B C D E 1 Chapter 6: Applying Excel 2 3 Data 4...Ch. 6 - A B C D E 1 Chapter 6: Applying Excel 2 3 Data 4...Ch. 6 - A B C D E 1 Chapter 6: Applying...Ch. 6 - Diego Company manufactures one product that is...Ch. 6 - Prob. 2F15 Ch. 6 - Prob. 3F15 Ch. 6 - Prob. 4F15 Ch. 6 - Prob. 5F15 Ch. 6 - Diego Company manufactures one product that is...Ch. 6 - Prob. 7F15 Ch. 6 - Prob. 8F15 Ch. 6 - Prob. 9F15 Ch. 6 - Prob. 10F15 Ch. 6 - Prob. 11F15 Ch. 6 - Prob. 12F15 Ch. 6 - Prob. 13F15 Ch. 6 - Diego Company manufactures one product that is...Ch. 6 - Prob. 15F15 Ch. 6 - Prob. 1E Ch. 6 - Prob. 2E Ch. 6 - Prob. 3E Ch. 6 - Prob. 4E Ch. 6 - Prob. 5E Ch. 6 - EXERCISE 6-6 Variable and Absorption Costing Unit...Ch. 6 - Prob. 7E Ch. 6 - Prob. 8E Ch. 6 - EXERCISE 6-9 Variable and Absorption Costing Unit...Ch. 6 - Prob. 10E Ch. 6 - Prob. 11E Ch. 6 - Prob. 12E Ch. 6 - Prob. 13E Ch. 6 - Prob. 14E Ch. 6 - EXERCISE 6—15 Absorption Costing Unit Product Cost...Ch. 6 - EXERCISE 6-16 Working with a Segmented Income...Ch. 6 - Prob. 17E Ch. 6 - Prob. 18P Ch. 6 - Prob. 19P Ch. 6 - Prob. 20P Ch. 6 - PROBLEM 6—21 Segment Reporting and Decision-Making...Ch. 6 - Prob. 22P Ch. 6 - Prob. 23P Ch. 6 - PROBLEM 6-24 Companywide and Segment Break-Even...Ch. 6 - Prob. 25P Ch. 6 - Prob. 26P Ch. 6 - PROBLEM 6-27 Incentives Created by Absorption...Ch. 6 - Prob. 28P Ch. 6 - Prob. 29C Ch. 6 - Prob. 30C

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Recommended textbooks for you

FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education