Question

Using the scenario provided, your textbook, and at least one outside source discuss whether you agree with the intern’s decision to use an absorption format for her segmented income statement and her decision to allocate the common fixed expenses to the Commercial and Residential segments? Why or why not? Write in complete sentences and included proper APA citations for each of your sources used in your post.

Discussion

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	$750,000	$250,000	$500,000
Cost of goods sold	500,000	140,000	   360,000
Gross margin	250,000	110,000	140,000
Selling and administrative expenses	240,000	104,000	136,000
Net operating income	$ 10,000	$ 6,000	$    4,000

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 $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Discussion

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	$750,000	$250,000	$500,000
Cost of goods sold	500,000	140,000	   360,000
Gross margin	250,000	110,000	140,000
Selling and administrative expenses	240,000	104,000	136,000
Net operating income	$ 10,000	$ 6,000	$    4,000

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 $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses that would be avoided if the Residential segment is dropped.