Complete Question:
Crossfire Company segments its business into two regions - East and West. The company prepared a contribution format segmented income statement as shown below:
Total Company East West
Sales $900,000 $600,000 $300,000
Variable Expenses <u>675,000</u> <u>480,000</u> <u>195,000</u>
Contribution margin 225,000 120,000 105,000
Traceable Fixed Expenses 141,000 50,000 91,000
Segment Margin $84,000 $70,000 $14,000
Common Fixed Expenses 59,000
Net Operating Income $25,000
Instructions: (As given).
Answer:
<h2>Crossfire Company</h2>
1. Computation of the companywide break-even point in dollar sales:
Break-even point in dollar sales
= Sales = Total costs
Sales = $816,000
Total costs = Variable costs + Traceable fixed costs
= $675,000 + $141,000
= $816,000
2. Computation of the break-even point in dollar sales for the East region:
Break-even point in dollar sales
= Sales = Total costs
= $530,000
Total costs = $530,000 ($480,000 + 50,000)
3. Computation of the break-even point in dollar sales for the West region:
Break-even point in dollar sales
= Sales = Total costs
= $286,000
Total costs = $286,000 ($195,000 + 91,000)
4. A new segmented income statement based on the break-even dollar sales that are computed in requirements 2 and 3:
Total Company East West
Sales $816,000 $530,000 $286,000
Variable Expenses <u>675,000</u> <u>480,000</u> <u>195,000</u>
Contribution margin 141,000 50,000 105,000
Traceable Fixed Expenses 141,000 50,000 91,000
Segment Margin $0 $0 $0
Common Fixed Expenses 59,000
Net Operating Income/(loss) ($59,000)
Crossfire's net operating income (loss) in the new segmented income statement is: $59,000
5. I think that Crossfire should allocate the common fixed expenses to the East and West regions when computing the break-even points for each region.
This ensures that Crossfire does not run into net operating loss, company-wide. The segmented sales revenues for the regions can be used to allocate the common fixed expenses. Other suitable bases are traceable fixed expense, number of sales and administrative staff, or activity cost pools, using activity-based costing technique.
Explanation:
a) Break-even point in sales dollars is the sales point at which Crossfire's sales revenue will be equal to the total costs. At this point, Crossfire will not make any profit or incur any loss.
