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 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:

* This includes common fixed costs totaling $18,000, allocated to each product in proportion to its revenues

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 headsets 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; however, 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 SystemC?

Transcribed Image Text:

System A $45,000 20,000 $25,000 10,000 System B $ 32,500 25,500 $ 7,000 18,000 $11,000) Headset $8,000 3,200 $4,800 2,700 $2,100 Sales Less: Variable expenses Contribution margin Less: Fixed costs Operating income