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
$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 ________.

Answer 1

In preparing these statements, the intern determined that Toxaway's only variable selling and administrative expense is a commission on sales.

Step-by-step explanation:

To calculate the variable selling and administrative expense, one needs to find the difference between the total selling and administrative expenses and the fixed portion. In this case, the total selling and administrative expenses are $240,000, with $136,000 allocated to the variable portion. The difference between the total and variable expenses gives the fixed component. Therefore, $240,000 - $136,000 = $104,000 represents the fixed selling and administrative expenses.

This implies that the only variable selling and administrative expense for Toxaway is $136,000, which is the commission on sales. To further understand the impact of this variable expense, one can look at the contribution margin for each division.

The contribution margin is calculated by subtracting the variable expenses from the sales. For the commercial division, the contribution margin is $250,000 - $140,000 = $110,000, and for the residential division, it is $500,000 - $360,000 = $140,000. This information is crucial for the divisional managers to assess profitability and make informed decisions regarding their break-even points. Therefore, the commission on sales plays a significant role in understanding the cost structure of Toxaway's divisions.