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

Question

The comparative balance sheets and an income statement for Raceway Corporation follow. Balance Sheets As of December 31 Year 2 Year 1 Assets Cash $ 6,300 $ 48,400 Accounts receivable 10,200 7,260 Inventory 45,200 56,000 Prepaid rent 700 2,140 Equipment 140,000 144,000 Accumulated depreciation (73,400) (118,000) Land 116,000 50,000 Total assets $ 245,000 $ 189,800 Liabilities Accounts payable (inventory) $ 37,200 $ 40,000 Salaries payable 12,200 10,600 Stockholders’ equity Common stock, $50 par value 150,000 120,000 Retained earnings 45,600 19,200 Total liabilities and stockholders’ equity $ 245,000 $ 189,800 Income Statement For the Year Ended December 31, Year 2 Sales $ 480,000 Cost of goods sold (264,000) Gross profit 216,000 Operating expenses Depreciation expense (11,400) Rent expense (7,000) Salaries expense (95,200) Other operating expenses (76,000) Net income $ 26,400 Other Information Purchased…

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The comparative balance sheets and an income statement for Raceway Corporation follow. Balance Sheets As of December 31 Year 2 Year 1 Assets Cash $ 6,300 $ 48,400 Accounts receivable 10,200 7,260 Inventory 45,200 56,000 Prepaid rent 700 2,140 Equipment 140,000 144,000 Accumulated depreciation (73,400) (118,000) Land 116,000 50,000 Total assets $ 245,000 $ 189,800 Liabilities Accounts payable (inventory) $ 37,200 $ 40,000 Salaries payable 12,200 10,600 Stockholders’ equity Common stock, $50 par value 150,000 120,000 Retained earnings 45,600 19,200 Total liabilities and stockholders’ equity $ 245,000 $ 189,800 Income Statement For the Year Ended December 31, Year 2 Sales $ 480,000 Cost of goods sold (264,000) Gross profit 216,000 Operating expenses Depreciation expense (11,400) Rent expense (7,000) Salaries expense (95,200) Other operating expenses (76,000) Net income $ 26,400 Other Information Purchased…

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