The Shock Shop is a merchandiser of electrical components. Their business is separated into the Commercial segment
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Question:
The Shock Shop is a merchandiser of electrical components. Their business is separated into the Commercial segment serving electrical contractors and the Residential segment serving the (DIY) do-it-yourself clients. They pride themselves in differentiating themselves from big-box houses by providing personalized services, a discount points club, home delivery services. The companys owner, Jack Shock, asked his CPA to prepare a segmented income statement that he and his executive team could use to better understand their break-even point and related business decisions. The CPA presented the following statement in a traditional income statement format.
Divisions | Total | ||
Commercial | Residential | Company | |
Sales | $320,000 | $480,000 | $800,000 |
Cost of Goods Sold | $140,800 | $240,000 | $380,800 |
Gross Profit | $179,200 | $240,000 | $419,200 |
Selling and Administration Expenses | $122,000 | $133,000 | $255,000 |
Net Operating Income | $164,200 |
In preparing the above statement, the CPA determined the following:
- The selling and administration expenses included a variable component equal to 10% of sales
- Of the remaining fixed costs, those traceable to the Commercial segment were $60,000 and $40,000 to the Residential segment.
- In addition, $75,000 was deemed to be a common fixed cost since it could not be directly traceable to the respective segments.
Required:
- Do you believe that the CPA should have used the traditional format in response to Mr. Shocks request? Why?
- From the data provided, create a Contribution Margin format income statement.
- From the material provided, determine the following:
- How much of the $75,000 of common fixed costs were allocated to the two segments?
- Which technique did the CPA use to determine how to allocate the common fixed costs: gross profit, COGS, or sales?
- What are your thoughts regarding the concept of allocating common fixed costs to segments?
- Compute the break event point for
- The Shock Shop as a whole
- The Commercial segment
- The Residential segment
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