5.3

Toxaway Company is a merchandiser that segments its business into two divisionsCommercial and Residential. The companys accounting intern was asked to prepare segmented income statements that the companys divisional managers could use to calculate their break-even points and make decisions. She took the prior months companywide income statement and prepared the absorption format segmented income statement shown below:

	Total Company			Commercial			Residential
Sales	$	780,000		$	260,000		$	520,000
Cost of goods sold		517,400			143,000			374,400
Gross margin		262,600			117,000			145,600
Selling and administrative expenses		248,000			108,000			140,000
Net operating income	$	14,600		$	9,000		$	5,600

In preparing these statements, the intern determined that Toxaways only variable selling and administrative expense is a 10% sales commission on all sales. The companys total fixed expenses include $84,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $32,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $54,000 of fixed expenses that would be avoided if the Commericial segment is dropped.

Required:

1. Do you agree with the interns decision to use an absorption format for her segmented income statement?

Yes or No?

2-a. Based on the interns segmented income statement, can you determine how she allocated the companys common fixed expenses to the Commercial and Residential segments? common fixed expenses commerical? residential?

3. Redo the intern's segmented income statement using the contribution format. Toxaway Company Variable Costing Income Statement Total Company CommeroialResidential Variable expenses Total variable expenses