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	$ 1,050,000	$ 350,000	$ 700,000
Cost of goods sold	682,500	178,500	504,000
Gross margin	367,500	171,500	196,000
Selling and administrative expenses	320,000	144,000	176,000
Net operating income	$ 47,500	$ 27,500	$ 20,000

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 $57,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $90,000 of fixed expenses that would disappear if the Commercial segment is dropped, and $68,000 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 $17,500 and $35,000, 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.

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

	Yes or No

2a. Based on a review of the interns segmented income statement, how much of the companys common fixed expenses did she allocate to the Commercial and Residential segments?

	Commercial	Residential
Common fixed expenses

2b. Based on a review of the interns segmented income statement, which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments?

	Sales Cost of goods sold Gross margin

3. Do you agree with the interns decision to allocate the common fixed expenses to the Commercial and Residential segments?

	Yes or No

4. Redo the interns segmented income statement using the contribution format.

Toxaway Company
Income Statement
	Total Company	Commercial	Residential
Sales
Variable expenses:
Cost of goods sold
Sales commissions
Total variable expenses	0	0	0
Contribution margin	0	0	0
Traceable fixed expenses
Segment margin	0	$0	$0
Common fixed expenses
Net operating income	$0

5. Compute the companywide break-even point in dollar sales. (Round intermediate calculations to 3 decimal places and final answer to the nearest whole dollar amount.)

Break-even point

6. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division. (Round CM ratio to 2 decimal places and final answer to the nearest whole dollar amount.)

	Commercial Division	Residential Division
Break-even point

7. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $17,500 and $35,000, 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. (Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.)

	Commercial Division	Residential Division
Break-even point