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In: Accounting

AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems...

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:

System A System B Headset
Sales $ 45,000 $ 32,500 $ 8,000
Less: Variable expenses 20,000 25,500 3,200
Contribution margin $25,000 $7,000 $4,800
Less: Fixed costs * 10,000 18,000 2,700
Operating income (loss) $15,000 $(11,000) $2,100

* 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%, and sales of headsets will drop by 25%. Round all answers to the nearest whole number.

Required:
1. Prepare segmented income statements for the three products using a better format.
2. CONCEPTUAL CONNECTION: Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped?
3. CONCEPTUAL CONNECTION: 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% of the revenues of B, and sales of the headsets would drop by 10%. The contribution margin ratio of C is 50%, and its direct fixed costs would be identical to those of B. Should System B be dropped and replaced with System C?

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