Toxaway Company is a merchandiser that segments its business into two divisions$$Commercial and Residential. The company$$s accounting intern was asked to prepare segmented income statements that the company$$s divisional managers could use to calculate their break$-$even points and make decisions. She took the prior month$$s companywide income statement and prepared the absorption format segmented income statement shown below:

Total

Company Commercial Residential

Sales $ $900,000$ $ $300,000$ $ $600,000$

Cost of goods sold $579,000153,000426,000$

Gross margin $321,000147,000174,000$

Selling and administrative expenses $280,000124,000156,000$

Net operating income $ $41,000$ $ $23,000$ $ $18,000$

In preparing these statements, the intern determined that Toxaway$$s only variable selling and administrative expense is a $10\%$ sales commission on all sales. The company$$s total fixed expenses include $$72,000$ of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $$70,000$ of fixed expenses that would be avoided if the Commercial segment is dropped, and $$48,000$ of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

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

$2.$ Based on a review of the intern$$s segmented income statement:

a$.$ How much of the company$$s 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 intern$$s decision to allocate the common fixed expenses to the Commercial and Residential segments?

$4.$ Redo the intern$$s 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 $$21,000$ and $$42,000,$ 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.