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	$	975,000		$	650,000		$	325,000
Variable expenses		682,500			487,500			195,000
Contribution margin		292,500			162,500			130,000
Traceable fixed expenses		156,000			68,000			88,000
Segment margin		136,500		$	94,500		$	42,000
Common fixed expenses		60,000
Net operating income	$	76,500

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	162500	130000
Sales	975000	650000	325000
Contribution margin ratio	30.00%	25.00%	40.00%
Break even point = Fixed expenses/ Contribution margin ratio
1
Companywide Break even point	720000	=(156000+60000)/30%
2
Break even point East region	272000	=68000/25%
3
Break even point West region	220000	=88000/40%
4
	Total company	East	West
Sales	492000	272000	220000
Variable expenses	336000	204000	132000
Contribution margin	156000	68000	88000
Traceable fixed expenses	156000	68000	88000
Segment margin	0	0	0
Common fixed expenses	60000
Net operating loss	(60000)
5
No, Common fixed expenses should not be allocated