total company commercial residential

sales 750000 250000 500000

cost of goods sold 500000 140000 360000

gross margin 250000 110000 140000

selling and administrative expenses 240000 104000 136000

net operating income 10000 6000 4000

In preparing these statements, the intern determined that Baxter and Holmes' 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 would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses would be avoided if the Residential segment is dropped.

1.Do you agree with the intern's decision to use an absorption format for her segmental income statement? Explain why you agree or disagree.

2.In preparing the segmented income statement, the intern allocated the common fixed expenses to the Commercial and Residential segments. Do you agree with the intern's decision to allocate the common fixed costs to the two divisions? Explain why you agree or disagree