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.

	Divisions		Total
	Commercial	Residential	Company
Sales	$320,000	$480,000	$800,000
Cost of Goods Sold	$140,800	$240,000	$380,800
Gross Profit	$179,200	$240,000	$419,200
Selling and Administration Expenses	$122,000	$133,000	$255,000
Net 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
   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. The Shock Shop as a whole
2. The Commercial segment
3. The Residential segment

Additional Info (Please help me understand this data in regards to the question above)

	Divisions		Total
	Commercial	Residential	Company
Sales	$320,000	$480,000	$800,000
Variable Costs
- COGS	$140,800	$240,000	$380,800
- Variable S & A Expense	$32,000	$48,000	$80,000
Total Variable Costs	$172,800	$288,000	$460,800
Contribuiton Margin	$147,200	$192,000	$339,200
Traceable Fixed Costs	$60,000	$40,000	$100,000
Segment Margin	$87,200	$152,000	$239,200
Common Fixed Costs			$75,000
Net Operating Income			$164,200
	Divisions		Total
	Commercial	Residential	Company
Sales	$165,094	$247,642	412736
Variable Costs
- COGS	72,642	123,821	196,462
- Variable S & A Expense	$16,509	$24,764	$41,274
Total Variable Costs	$89,151	$148,585	$237,736
Contribuiton Margin	$75,943	$99,057	$175,000
Traceable Fixed Costs	$60,000	$40,000	$100,000
Segment Margin	$15,943	$59,057	$75,000
Common Fixed Costs			$75,000
Net Operating Income

	Commercial	Residential
Sales	$130,435	$100,000
Variable Costs
- COGS	$57,391	$50,000
- Variable S & A Expense	$13,044	$10,000
Total Variable Costs	$70,435	$60,000
Contribuiton Margin	$60,000	$40,000
Traceable Fixed Costs	$60,000	$40,000
Segment Margin	$0	$0
Common Fixed Costs
Net Operating Income