Problem $7-24($Static$)$ Companywide and Segment Break$-$Even Analysis; Decision Making $[$LO$7-4,$ LO$7-5]$

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

Sales $ $750,000$ $ $250,000$ $ $500,000$

Cost of goods sold $500,000140,000360,000$

Gross margin $250,000110,000140,000$

Selling and administrative expenses $240,000104,000136,000$

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

Required:

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

$2.$ Based on a review of the intern$$s segmented income statement.

a$.$ How much of the company$$s common fixed expenses did she allocate to the Commercial and Residential segments?

b$.$ Which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments: $($a$)$ sales, $($b$)$ cost of goods sold, or $($c$)$ gross margin?

$3.$ Do you agree with the intern$$s decision to allocate the common fixed expenses to the Commercial and Residential segments?

$4.$ Redo the intern$$s segmented income statement using the contribution format.

$5.$ Compute the companywide break$-$even point in dollar sales.

$6.$ Compute the break$-$even point in dollar sales for the Commercial Division and for the Residential Division.

$7.$ 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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