AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that have radios, tape players, and speakers. System A, of slightly higher quality than System B, costs $ 20 than System B, costs $20 more. With rare exceptions, the store also sells a headset when a system is sold. The headset can be used with either system. Variable- costing income statements for the three products follow:
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.
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?

  • CreatedSeptember 22, 2015
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