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	$	1,005,000		$	335,000		$	670,000
Cost of goods sold		670,000			180,900			489,100
Gross margin		335,000			154,100			180,900
Selling and administrative expenses		308,000			138,000			170,000
Net operating income	$	27,000		$	16,100		$	10,900

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 $61,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $84,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $62,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

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 $14,500 and $29,000, 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

BREAK EVEN SALES:
	Commercial	Residential	Total Company
Sales	335000	670000	1005000
Variable cost:
COGS	180900	489100	670000
Selling commi	33500	67000	100500
Total	214400	556100	770500
Contribution	120600	113900	234500
(b)Contri margin, %	0.36	0.17	0.23
(a)Fixed Cost	104500	103000	207500
(c) sales ratio	0.33	0.67
5) Companywide BEP (in$), (a/b)			889286
6) Product-wise BEP (in$), (5)/c	296429	592857
7) If sales staff paid salary and sales commission reduced to 5%,
than new break even point in dollar sale:
	Commercial	Residential	Total Company
Sales	335000	670000	1005000
Variable cost:
COGS	180900	489100	670000
Selling commi	16750	33500	50250
Total	197650	522600	720250
Contribution	137350	147400	284750
(b)Contri margin, %	0.41	0.22	0.28
(a)Fixed Cost	119000	132000	251000
(c) sales ratio	0.33	0.67
Company-wide BEP (in$), (a/b)			885882
Product-wise BEP (in$), (5)/c	295294	590588