Kneeland Corporation has two divisions: Grocery Division and Convenience Division. The following report is for the most recent operating period: Total CompanyGrocery DivisionConvenience DivisionSales$427,000$321,000$106,000Variable expenses 119,380 70,620 48,760Contribution margin 307,620 250,380 57,240Traceable fixed expenses 239,000 194,000 45,000Segment margin 68,620 56,380 12,240Common fixed expense 46,970 35,310 11,660Net operating income$21,650$21,070$580The common fixed expenses have been allocated to the divisions on the basis of sales.Required:a. What is the Grocery Division's break-even in sales dollars?b. What is the Convenience Division's break-even in sales dollars?c. What is the company's overall break-even in sales dollars?d. What would be the company's
overall net operating income if the company operated at its two division's break-even points?
What will be an ideal response?
a.
Grocery Division break-even:
Segment CM ratio = Segment contribution margin ÷ Segment sales
= $250,380 ÷ $321,000 = 0.780
Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= $194,000 ÷ 0.780 = $248,718
b.
Convenience Division break-even:
Segment CM ratio = Segment contribution margin ÷ Segment sales
= $57,240 ÷ $106,000 = 0.540
Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= $45,000 ÷ 0.540 = $83,333
c.
The company's overall break-even sales:
CM ratio = Contribution margin ÷ Sales
= $307,620 ÷ $427,000 = 0.720 (rounded)
Total fixed expenses = Total traceable fixed expenses + Common fixed expenses
= $239,000 + $46,970 = $285,970
Dollar sales to break even = Total fixed expenses ÷ CM ratio
= $285,970 ÷ 0.720 = $396,948 (using the unrounded CM ratio)
d. If the company operates at the break-even points for its two divisions, it will have a net operating loss of $46,970 because it will not cover its common fixed expense of $46,970.
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