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	$	795,000		$	265,000		$	530,000
Cost of goods sold		535,300			148,400			386,900
Gross margin		259,700			116,600			143,100
Selling and administrative expenses		252,000			110,000			142,000
Net operating income	$	7,700		$	6,600		$	1,100

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 $82,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $56,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $34,000 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.

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 $14,000 and $28,000, 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.

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