AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that
Question:
The owner of the store is concerned about the profit performance of System B and is considering dropping it. If the product is dropped, sales of System A will increase by 30 percent, and sales of headsets will drop by 25 percent.
Required:
1. Prepare segmented income statements for the three products using a better format.
2. Prepare segmented income statements for System A and the head-sets assuming that System B is dropped. Should B be dropped?
3. Suppose that a third system, System C, with a similar quality to System B, could be acquired. Assume that with C the sales of A would remain unchanged. How-ever, C would produce only 80 percent of the revenues of B, and sales of the headsets would drop by 10 percent. The contribution margin ratio of C is 50 percent, and its direct fixed costs would be identical to those of B. Should System B be dropped and replaced with System C?
Step by Step Answer:
Cornerstones of Financial and Managerial Accounting
ISBN: 978-1111879044
2nd edition
Authors: Rich, Jeff Jones, Dan Heitger, Maryanne Mowen, Don Hansen