Required:
1. Compute the companywide break-even point in dollar sales.
2. Compute the break-even point in dollar sales for the East region.
3. Compute the break-even point in dollar sales for the West region.
4. Prepare a new segmented income statement based on the break-even dollar sales that you computed in requirements 2 and 3. Use the same format as shown above. What is Crossfire’s net operating income (loss) in your new segmented income statement?
5. Do you think that Crossfire should allocate its common fixed expenses to the East and West regions when computing the break-even points for each region?
Explanation
1.
The companywide break-even point is computed as follows:
| Dollar sales for company to break even | = | Traceable fixed expenses + Common fixed expenses |
| Overall CM ratio |
| = | $158,000 + $70,000 | |
| $288,000 ÷ $960,000 |
| = | $228,000 | |
| 0.30 |
| = | $760,000 |
2.
The break-even point for the East region is computed as follows:
| Dollar sales for a segment to break even | = | Segment traceable fixed expenses |
| Segment CM ratio |
| = | $69,000 | |
| $160,000 ÷ $640,000 |
| = | $69,000 | |
| 0.25 |
| = | $276,000 |
3.
The break-even point for the West region is computed as follows:
| Dollar sales for a segment to break even | = | Segment traceable fixed expenses |
| Segment CM ratio |
| = | $89,000 | |
| $128,000 ÷ $320,000 |
| = | $89,000 | |
| 0.40 |
| = | $222,500 |
4.
Variable expenses:
East: $276,000 × 0.75 variable expense ratio = $207,000.
West: $222,500 × 0.60 variable expense ratio = $133,500.
Contribution margin:
East: $276,000 × 0.25 CM ratio = $69,000.
West: $222,500 × 0.40 CM ratio = $89,000.
5.
No, a company should not allocate its common fixed expenses to business segments. These costs are not traceable to individual segments and will not be affected by segment-level decisions.
Thanks
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