Toxaway Company is a merchandiser that segments its business into two divisions Commercial and Residential. The companys accounting intern was asked to prepare segmented income statements that the companys divisional managers could use to calculate their break-even points and Toxaway Company is a merchandiser that segments its business into two divisions Commercial and Residential. The companys accounting intern was asked to prepare segmented income statements that the companys divisional managers could use to calculate their break-even points and make decisions. She took the prior months companywide income statement and prepared the absorption format segmented income statement shown below:

	Total Company	Commercial	Residential
Sales	900,000	300,000	600,000
Cost of goods sold	600,000	168000	432000
Gross margin	300000	132000	168000
Selling and Administrative expenses	288000	124800	163200
Net operating income	12000	7200	4800

In preparing these statements, the intern determined that Toxaways only variable selling and administrative expense is a 10% sales commission on all sales. The companys total fixed expenses include $86,400 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $45,600 of fixed expenses that would be avoided if the Residential segment is dropped, and $66,000 of fixed expenses that would be avoided if the Commercial segment is dropped.

Required:

1. Do you agree with the interns decision to use an absorption format for her segmented income statement? Why?

2. Based on the interns segmented income statement, can you determine how she allocated the companys common fixed expenses to the Commercial and Residential segments? Do you agree with her decision to allocate the common fixed expenses to the Commercial and Residential segments?

3. Redo the interns segmented income statement using the contribution format.

4. Compute the companywide break-even point in dollar sales.

5. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.

6. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $18,000 and $36,000, 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.