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 $ 945,000 $ 315,000 $ 630,000

Cost of goods sold 630,000 170,100 459,900

Gross margin 315,000 144,900 170,100

Selling and administrative expenses 292,000 130,000 162,000

Net operating income $ 23,000 $ 14,900 $ 8,100

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 $67,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $76,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $54,000 of fixed expenses that would be avoided 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.