Help Sa 3 prepare segmented Income statements that the company\'s divisional cou

Question

Help Sa 3 prepare segmented Income statements that the company's divisional could use to points and make declsions. She took the prior month's companywide Income statement and prepared the absorption format segmented Income statement shown below 990,000 330,000 660,000 181,500481,800 178,200 168,000 663,300148.500 326,700 304,000 Cost of goods sold and 136,000 22,700 12,500 10,200 In preparing these statements, the intern determined that Toxaway's only variable selling and administrative e commission on all sales. T incurred even if he company's total fixed expenses include $63,000 of common fixed expenses that would continue to be l or Residential segments are discontinued, $82,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $60,000 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 $13,500 and $27,000, 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. s in the Commercial and Residential Divisions a total monthly salary of

Explanation / Answer

1) The intern’s decision to use an absorption format for her segmented income statement is not a good idea because because it does not focus on cost behaviour. When decision and break even analysis to make the contribution income statement is better than the absorption income statement because it separates costs into variable cost and fixed cost . 2A)The amount of common fixed expenses allocated to each segment is computed as follows Total Company Commercial Residential Total selling and administrative expense (a) $304,000 $136,000 $168,000 Traceable fixed expenses $142,000 $82,000 $60,000 Sales commissions (10% of sales) $99,000 $33,000 $66,000 Selling and administrative expenses accounted for (b) $241,000 $115,000 $126,000 Common fixed expenses (a) – (b) $63,000 $21,000 $42,000 2B) The common fixed expenses were allocated to segments based on sales dollars since the amount of common fixed expenses allocated to Residential ($42,000) is twice as much as the amount of common fixed expenses allocated to Commercial ($21,000). Because the Residential sales ($660,000) are twice as much as the Commercial sales ($330,000) 3)Her decision to allocate the common fixed expenses to the Commercial and Residential segment is also not correct because fixed costs are not traceable to segments and they are not affected by segment-level decisions. 4) Contribution format segmented income statements Toxoway Income statement Total Company Commercial Residential Sales $990,000 $330,000 $660,000 Variable Expenses Cost of Goods Sold $663,300 $181,500 $481,800 Sales commissions (10% of sales) $99,000 $33,000 $66,000 Total variable expenses $762,300 $214,500 $547,800 Contribution margin =Sales - Tt. variable cost $227,700 $115,500 $112,200 Traceable fixed expenses $142,000 $82,000 $60,000 Segment margin $85,700 $33,500 $52,200 Common fixed expenses $63,000 Net Operating Income $22,700 5) Dollar sales for company to break even = Traceable fixed expenses + Common fixed expenses/Overall CM ratio Contribution Ratio = $227700/$990000 23.00% Dollar sales for company to break even = ($142000 +$63000)/23% $891,304.35 6) Dollar sales for a segment to break even = Com. Segment traceable fixed expenses/Com. Contribution Ratio Commercial Dollar sales for a segment to break even = $82000/115,500/$330000) $234,285.71 Residential = $60000/(112,200/660000) $352,941.18

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