6-17 Should a company allocate its common fixed expenses to business segments when com- puting the break-even point for those segments? Why?
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Using the scenario provided, your textbook, and at least one outside source discuss whether you agree with the internâs 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 divisionsâCommercial and Residential. The companyâs accounting intern was asked to prepare segmented income statements that the companyâs divisional managers could use to calculate their break-even points and make decisions. She took the prior monthâs 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 | ââ 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 | $âââ 4,000 |
In preparing these statements, the intern determined that Toxawayâs only variable selling and administrative expense is a 10% sales commission on all sales. The companyâs 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 divisionsâCommercial and Residential. The companyâs accounting intern was asked to prepare segmented income statements that the companyâs divisional managers could use to calculate their break-even points and make decisions. She took the prior monthâs 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 | ââ 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 | $âââ 4,000 |
In preparing these statements, the intern determined that Toxawayâs only variable selling and administrative expense is a 10% sales commission on all sales. The companyâs 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.