Question

Crossfire Company segments its business into two regions—East and West. The company prepared a contribution format...

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?

Homework Answers

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
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