The Shock Shop is a merchandiser of electrical components. Their business is separated into the Commercial segment serving electrical contractors and the Residential segment serving the (DIY) do-it-yourself clients. They pride themselves in differentiating themselves from big-box houses by providing personalized services, a discount points club, home delivery services. The companys owner, Jack Shock, asked his CPA to prepare a segmented income statement that he and his executive team could use to better understand their break-even point and related business decisions. The CPA presented the following statement in a traditional income statement format.

DivisionsTotal CommercialResidentialCompanySales$320,000$480,000$800,000Cost of Goods Sold$140,800$240,000$380,800Gross Profit$179,200$240,000$419,200Selling and Administration Expenses$122,000$133,000$255,000Net Operating Income $164,200

In preparing the above statement, the CPA determined the following:

• The selling and administration expenses included a variable component equal to 10% of sales
• IN terms of fixed costs, those traceable to the Commercial segment were $60,000 and $40,000 to the Residential segment.
• In addition, $75,000 was deemed to be a common fixed cost since it could not be directly traceable to the respective segments.

Required:

1. Do you believe that the CPA should have used the traditional format in response to Mr. Shocks request? Why?
2. From the data provided, create a Contribution Margin format income statement.
3. From the material provided, determine the following:
4. 1. How much of the $75,000 of common fixed costs were allocated to the two segments?
   2. Which technique did the CPA use to determine how to allocate the common fixed costs: gross profit, COGS, or sales?
   3. What are your thoughts regarding the concept of allocating common fixed costs to segments?

4. Compute the break event point for

1. 1. The Shock Shop as a whole
   2. The Commercial segment
   3. The Residential segment