Managerial Accounting Homework

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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

$

960,000

$

320,000

$

640,000

Cost of goods sold

636,800

169,600

467,200

Gross margin

323,200

150,400

172,800

Selling and administrative expenses

296,000

132,000

164,000

Net operating income

$

27,200

$

18,400

$

8,800


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 $66,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $78,000 of fixed expenses that would be avoided if the Commericial segment is dropped, and $56,000 of fixed expenses that would be avoided if the Residential segment is dropped.

Required:

1. Do you agree with the intern’s decision to use an absorption format for her segmented income statement?

2. Based on a review of the intern’s segmented income statement.

a. How much of the company’s common fixed expenses did she allocate to the Commercial and Residential segments?

b. Which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments: (a) sales, (b) cost of goods sold, or (c) gross margin?

3. Do you agree with the intern’s decision to allocate the common fixed expenses to the Commercial and Residential segments?

4. Redo the intern’s segmented income statement using the contribution format.

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 $25,000 and $50,000, 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.

Req 1

Do you agree with the intern’s decision to use an absorption format for her segmented income statement?

Req 2

Based on a review of the intern’s segmented income statement, how much of the company’s common fixed expenses did she allocate to the Commercial and Residential segments?

Commercial

Residential

Common fixed expenses

Req 3

Based on a review of the intern’s segmented income statement, which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments?

Sales

Cost of goods sold

Gross margin

Req 4

Do you agree with the intern’s decision to allocate the common fixed expenses to the Commercial and Residential segments?

Yes

No

Req 5

Redo the intern’s segmented income statement using the contribution format.

Toxaway Company

Income Statement

Total Company

Commercial

Residential

Variable expenses:

Total variable expenses

0

0

0

0

0

0

0

$0

$0

$0

Req 6

Compute the companywide break-even point in dollar sales. (Round intermediate calculations to 3 decimal places and final answer to the nearest whole dollar amount.)

Break-even point

Req 7

Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division. (Round CM ratio to 2 decimal places and final answer to the nearest whole dollar amount.)

Commercial Division

Residential Division

Break-even point

Req 8

Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $25,000 and $50,000, 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. (Round CM ratio to 2 decimal places and final answers to the nearest whole dollar amount.)

Show less

Commercial Division

Residential Division

Break-even point

Question 2

Ida Sidha Karya Company is a family-owned company located in the village of Gianyar on the island of Bali in Indonesia. The company produces a handcrafted Balinese musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $880. Selected data for the company’s operations last year follow:

Units in beginning inventory

0

Units produced

280

Units sold

255

Units in ending inventory

25

Variable costs per unit:

Direct materials

$

105

Direct labor

$

315

Variable manufacturing overhead

$

35

Variable selling and administrative

$

40

Fixed costs:

Fixed manufacturing overhead

$

63,000

Fixed selling and administrative

$

32,000


The absorption costing income statement prepared by the company’s accountant for last year appears below:

Sales

$

224,400

Cost of goods sold

173,400

Gross margin

51,000

Selling and administrative expense

42,200

Net operating income

$

8,800


Required:

1. Under absorption costing, how much fixed manufacturing overhead cost is included in the company’s inventory at the end of last year?

2. Prepare an income statement for last year using variable costin

Req 1

Under absorption costing, how much fixed manufacturing overhead cost is included in the company’s inventory at the end of last year?

Fixed manufacturing overhead cost included in inventory

Req 2

Prepare an income statement for last year using variable costing.

Ida Sidha Karya Company

Variable Costing Income Statement

Question 3

Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

Variable costs per unit:

Manufacturing:

Direct materials

$

22

Direct labor

$

17

Variable manufacturing overhead

$

3

Variable selling and administrative

$

2

Fixed costs per year:

Fixed manufacturing overhead

$

320,000

Fixed selling and administrative expenses

$

90,000


During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $51 per unit.

Required:

1. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2.

2. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2.

3. Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Req 1

Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2.

Year 1

Year 2

Unit product cost

Req 2

Assume the company uses variable costing. Prepare an income statement for Year 1 and Year 2.

Walsh Company

Income Statement

Year 1

Year 2

Net operating income (loss)

Req 3

Assume the company uses absorption costing. Compute the unit product cost for Year 1 and Year 2. (Round your answer to 2 decimal places.)

Year 1

Year 2

Unit product cost

Req 4

Assume the company uses absorption costing. Prepare an income statement for Year 1 and Year 2. (Round your intermediate calculations to 2 decimal places.)

Walsh Company

Income Statement

Year 1

Year 2

Req 5

Reconcile the difference between variable costing and absorption costing net operating income in Year 1. (Enter any losses or deductions as a negative value.)

Year 1

Year 2

Variable costing net operating income (loss)

Absorption costing net operating income (loss)

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