Audio Mart 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 TOTAL

Sales	$45,000		$36,000		$9,000	$90,000
Variable expenses	20,000		25,500		3,200	48,700
Contribution margin	25,000		10,500		5,800	41,300
Less: fixed cost*	10,000		18,000		2,000	30,000
Operating Income	$15,000		$ (7,500)		$3,800	$11,300

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%.

Also, the total fixed cost will be shared by the remaining two products in equal proportion.

Required:

a. Prepare segmented income statements for System A and the Headsets assuming that System B is dropped.

b. Should System B be dropped? Why?