Problem 7-24 (Algo) Companywide and Segment Break-Even Analysis; Decision Making [LO7-4, LO7-5]

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, $54,000 of fixed expenses that would disappear if the Commercial segment is dropped, and $32,000 of fixed expenses that would disappear if the Residential segment is dropped.

Required:

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

2. Based on a review of the interns segmented income statement.

a. How much of the companys 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 interns decision to allocate the common fixed expenses to the Commercial and Residential segments?

4. Redo the interns 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 $13,000 and $26,000, 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.