Please help me solve this problem on Companywide Segment Break-Even Analysis and
ID: 2539156 • Letter: P
Question
Please help me solve this problem on Companywide Segment Break-Even Analysis and Decision Making.
Problem 6-24 Companywide and Segment Break-Even Analysis; Decision Making [LO6-4, LO6-5] 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 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income Company Commercial Residential 848,e0 28e,ee 56e,800 154, 00e 126,008 116,908 403, 206e 156,800 148,80e $ 18,880 1e,00e 8,800 557, 200e 282,800 264,80e 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 $78,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $62,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $40,000 of fixed expenses that would be avoided if the Residential segment is droppec. 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 $17,000 and $34,000, 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. Complete this question by entering your answers in the tabs below Req 1 Req 2A Req 2B Req 3 Req 4 Req 5 Req 6 Req 7 Do you agree with the intern's decision to use an absorption format for her segmented income statement? Yes No Req 2A Req 2B Req 3 Req 4 Req 5 Req 6 Req 7 Based on a review of the intern's segmented income statement, how much of the company's common fixed expenses did she allocate to the Commercial and Residential segments? Commercial Residential Common fixed expenses Req 2A Req 2B Req 3 Req 4 Req 5 Req 6 Req 7 Based on a review of the intern's segmented income statement, which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments? Sales Cost of goods sold Gross marginExplanation / Answer
1. To analyze break even points and make decisions the contribution format of income statement will hold good than a absorption costing income statement. Therefore, the intern's decision is not agreeable.
2.
a)
b) The ratio of common fixed is 26000:52000 or 1: 2 and sales is in the ratio 280,000 : 560,000 or 1:2.
Therefore, she most likely used sales as a base to allocate common fixed expenses.
3) No, I do not agree with allocation of common fixed expenses separately to departments since common fixed expenses are not directly traceable to a particular department. Hence, they cannot be allocated.
4)
As per Chegg Policy, I have asnwered the first 4 sub parts of the question. Please post other parts seperately.
Commercial Residential Selling and Administrative Expenses 116000 148000 Less: Fixed Expenses[Already Given] 62000 40000 Sales Commission
[Sales *10%] 28000 56000 Common Fixed Expenses 26000 52000