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 . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000 $250,000 $500,000

Cost of goods sold . . . . . . . . . . . . . . . . . 500,000 140,000 360,000

Gross margin . . . . . . . . . . . . . . . . . . . . .250,000 110,000 140,000

Selling and administrative expenses. . . . . . 240,000 104,000 136,000

Net operating income. . . . . . . . . . . . . . . . $ 10,000 $ 6,000 $ 4,000

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 $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $38,000 of fixed expenses that would be avoided if the Residential segment is dropped, and $55,000 of fixed expenses that would be avoided if the Commericial segment is dropped.

Required: Do you agree with the interns decision to use an absorption format for her segmented income statement? Why? Based on the interns segmented income statement, can you determine how she allocated the companys common fixed expenses to the Commercial and Residential segments?

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

Redo the interns segmented income statement using the contribution format. Compute the companywide break-even point in dollar sales. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $15,000 and $30,000, 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.