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 intem 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 CompanyCommercial Residential Sales Cost of goods sold $975,000 $325,000 $650,000 182,000 481,000 663,000 Gross margin 312,000143,000 169,000 Selling and administrative expenses 300,000 134,000 166,000 Net operating income 12,000 9,000 3,000 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 $64,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $58,000 of fixed expenses that would be avoided if the Residential segment is dropped and $80,000 of fixed expenses that would be avoided if the Commericial segment is dropped. Required: 1. Do you agree with the intern's decision to use an absorption format for her segmented income statement? Ye 2-a. Based on the intern's segmented income statement can you determine how she allocated the company's common fixed expenses to the Commercial and Residential segments? Commercial Residential Common fixed expenses

Explanation / Answer

Total Company Commercial Resdential Sales 9,75,000 3,25,000 6,50,000 Sales ratio 33.33% 66.67% Total Company Commercial Resdential Sales 9,75,000 3,25,000 6,50,000 Cost of Goods Sold 6,63,000 1,82,000 4,81,000 Total Company Commercial Resdential Gross Margin 3,12,000 1,43,000 1,69,000 S&A Expenses 3,00,000 1,34,000 1,66,000 S&A Expenses 3,00,000 1,34,000 1,66,000 Variable(10% of Sales) 97500 32500 65000 Net Operating Income 12,000 9,000 3,000 Balance Fixed Expense 2,02,500 1,01,500 1,01,000 Breakup of Fixed Cost: Avoidable Fixed Cost 80,000 58,000 Common Fixed Cost 64500 Balance Fixed Expense Less Avoidable Cost 64500 21,500 43,000 Allocated in Sales Ratio 33.33% 66.67% 1 No, Since the motive of the segementated statements was to calculate Break even Point Intern should have gone to Variable costing system having Contribution Margin in each segement and have fixed cost calculated separately 2 Total Company Commercial Resdential Sales 9,75,000 3,25,000 6,50,000 Sales ratio 33.33% 66.67% Common Fixed Cost 64,500 21,500 43,000 2b Yes, Due to lack of any other base allocation basis sales is best 3 Total Company Commercial Resdential Sales 9,75,000 3,25,000 6,50,000 Variable Expenses: COGS 6,63,000 1,82,000 4,81,000 Variable S&A Expense 97,500 32,500 65,000 Total Variable Expense 7,60,500 2,14,500 5,46,000 Contribution Margin 2,14,500 1,10,500 1,04,000 Fixed Expenses 2,02,500 Net Operating Income 12,000 4 Company Wide Break Even Point Total Company Sales 975000 Variable Expenses: COGS 663000 Variable S&A Expense 97500 Total Variable Expense 760500 Contribution Margin Ratio Contribution Margin 214500 22.00% (214500/975000) Fixed Expenses 202500 Contribution Margin Ratio 22.00% Break Even Point in Dollars 9,20,455 (202500/22%) 5 Commercial Resdential Sales 3,25,000 6,50,000 Contribution Margin 1,10,500 1,04,000 Contribution Margin Ratio 34.00% 16.00% Traceable Fixed Costs 80,000 58,000 Break Even Point in Dollars 2,35,294 3,62,500 (Tracable FC/CM Ratio) 6 Commercial Resdential Sales 3,25,000 6,50,000 Variable Expenses: COGS 1,82,000 4,81,000 Variable S&A Expense(5% of Sales) 16,250 32,500 Total Variable Expense 1,98,250 5,13,500 Contribution Margin 1,26,750 1,36,500 Contribution Margin Ratio 39.00% 21.00% Traceable Fixed Costs 80,000 58,000 Additional FC(Salaries) 12,500 25,000 Total Traceable FC 92,500 83,000 Break Even Point in Dollars 2,37,179 3,95,238 (Tracable FC/CM Ratio)

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