Question

Exercise 6-10 Companywide and Segment Break-Even Analysis [LO6-5]

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	$	1,170,000		$	720,000		$	450,000
Variable expenses		877,500			576,000			301,500
Contribution margin		292,500			144,000			148,500
Traceable fixed expenses		166,000			67,000			99,000
Segment margin		126,500		$	77,000		$	49,500
Common fixed expenses		60,000
Net operating income	$	66,500

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	292500	144000	148500
Sales	1170000	720000	450000
Contribution margin ratio	25.00%	20.00%	33.00%
Break even point = Fixed expenses/ Contribution margin ratio
1
Companywide Break even point	904000	=(166000+60000)/25%
2
Break even point East region	335000	=67000/20%
3
Break even point West region	300000	=99000/33%
4
	Total company	East	West
Sales	635000	335000	300000
Variable expenses	469000	268000	201000
Contribution margin	166000	67000	99000
Traceable fixed expenses	166000	67000	99000
Segment margin	0	0	0
Common fixed expenses	60000
Net operating loss	(60000)
5
No, Common fixed expenses should not be allocated