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:

	Total Company			Commercial			Residential
Sales	$	1,020,000		$	340,000		$	680,000
Cost of goods sold		669,800			180,200			489,600
Gross margin		350,200			159,800			190,400
Selling and administrative expenses		312,000			140,000			172,000
Net operating income	$	38,200		$	19,800		$	18,400

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 $60,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $86,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $64,000 of fixed expenses that would be avoided if the Residential segment is dropped.

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 $15,500 and $31,000, 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.

Answer 1

Answer with working notes is given below