Question

Crossfire Company segments its business into two regions—East and West. The company prepared a contribution format segmented income statement as shown below:

	Total Company			East			West
Sales	$	1,050,000		$	700,000		$	350,000
Variable expenses		787,500			560,000			227,500
Contribution margin		262,500			140,000			122,500
Traceable fixed expenses		152,000			61,000			91,000
Segment margin		110,500		$	79,000		$	31,500
Common fixed expenses		70,000
Net operating income	$	40,500

Required:

1. Compute the companywide break-even point in dollar sales.

2. Compute the break-even point in dollar sales for the East region.

3. Compute the break-even point in dollar sales for the West region.

4. Prepare a new segmented income statement based on the break-even dollar sales that you computed in requirements 2 and 3. Use the same format as shown above. What is Crossfire’s net operating income (loss) in your new segmented income statement?

5. Do you think that Crossfire should allocate its common fixed expenses to the East and West regions when computing the break-even points for each region?

Answer 1

	Total company	East	West
Contribution margin	262500	140000	122500
Sales	1050000	700000	350000
Contribution margin ratio	25.00%	20.00%	35.00%
Break even point = Fixed expenses/ Contribution margin ratio
1
Companywide Break even point	888000	=(152000+70000)/25%
2
Break even point East region	305000	=61000/20%
3
Break even point West region	260000	=91000/35%
4
	Total company	East	West
Sales	565000	305000	260000
Variable expenses	413000	244000	169000
Contribution margin	152000	61000	91000
Traceable fixed expenses	152000	61000	91000
Segment margin	0	0	0
Common fixed expenses	70000
Net operating loss	(70000)
5
No, Common fixed expenses should not be allocated