Toxaway Company is a merchandiser that segments its business into two divisions—

Question

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:

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 $85,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $52,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $30,000 of fixed expenses that would be avoided if the Residential segment is dropped.

7. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $12,000 and $24,000, 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

Total
Company Commercial Residential Sales $ 765,000 $ 255,000 $ 510,000 Cost of goods sold 510,000 142,800 367,200 Gross margin 255,000 112,200 142,800 Selling and administrative expenses 244,000 106,000 138,000 Net operating income $ 11,000 $ 6,200 $ 4,800

Explanation / Answer

Total Commercial Residential Total selling and administrative expense (a) $   244,000 $     106,000 $   138,000 Traceable fixed expenses         82,000           52,000         30,000 Sales commissions (10% of sales)         76,500           25,500         51,000 Selling and administrative expenses accounted for (b)       158,500           77,500         81,000 Common fixed expenses (a) – (b)    $     85,500 $       28,500 $     57,000 Total Commercial Residential Company Sales $765,000 $255,000 $510,000 Variable expenses:    Cost of goods sold       510,000         142,800       367,200    Sales commissions (10%)         76,500           25,500         51,000 Total variable expenses       586,500         168,300       418,200 Contribution margin       178,500           86,700         91,800 Traceable fixed expenses         82,000           52,000         30,000 Segment margin         96,500           34,700         61,800 Common fixed expenses         85,500 Net operating income         11,000 New Contrbution format income statement Total Commercial Residential Company Sales $765,000 $255,000 $510,000 Variable expenses:    Cost of goods sold       510,000         142,800       367,200    Sales commissions (10%)         38,250           12,750         25,500 Total variable expenses       548,250         155,550       392,700 Contribution margin       216,750           99,450       117,300 Traceable fixed expenses       118,000           64,000         54,000 Segment margin         98,750           35,450         63,300 Common fixed expenses         85,500 Net operating income         13,250 Contribution %(99450/255000; 117300/510000) 39.00% 23.00% Dollar sales for a segment to break even - Commercial = Segment traceable fixed expenses            Segment CM ratio = $64,000 0.39 = $164,103 (rounded) Dollar sales for a segment to break even - Residential = Segment traceable fixed expenses            Segment CM ratio = $54,000 0.23 = $234,783 (rounded)

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