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:

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?

Refer to the list below for the exact wording of an amount description within your income statement.

Amount Descriptions
Add: Common fixed cost
Add: Direct fixed cost
Add: Variable expenses
Contribution margin
Less: Common fixed cost
Less: Direct fixed cost
Less: Variable expenses
Operating income
Operating loss
Sales
Segment margin

System A System B Headset Sales $ 45,000 $ 32,500 S 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 1. Prepare segmented income statements for the three products. Refer to the list of Amount Descriptions for the exact wording of text items within your income statement. Round your answers to the nearest dollar. Input expenses as positive numbers. AudioMart Segmented Income Statement System A, System B, and Headset 1 System A System B Headset Total 2 Sales $45,000.00 $32,500.00 $8,000.00 $85,500.00 3 Less: Variable expenses 20,000.00 25,500.00 3,200.00 48,700.00 Contribution margin $25,000.00 $7,000.00 $4,800.00 $36,800.00 5 Less: Direct fixed cost 526.00 11,158.00 1,016.00 12.700.00 6 Segment margin $24.474.00 $(4.158.00) $3,784.00 $24,100.00 7 Less: Common fixed cost 18,000.00 3 Operating income $6,100.00 2(a) Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Refer to the list of Amount Descriptions for the exact wording of text items within your income statement. Round your answers to the nearest dollar. Input expenses as positive numbers. (Note: Be sure to complete 2(b) below the statement.) AudioMart Segmented Income Statement System A and Headset 1 System A Headset Total 2 3 4 5 2(b) Should system B be dropped? O Yes O No Suppose that a third system, System C, with a similar quality to System B, could be acquired. Assume that with 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. 3(a) Prepare segmented income statements for System A System C and the headsets. Refer to the list of Amount Descriptions for the exact wording of text items within your income statement. Round your answers to the nearest dollar. Input expenses as positive numbers. (Note: Be sure to complete 3(b) below the statement.) AudioMart Segmented Income Statement System A, System C, and Headset System A System Headset Total 2 Sales 3 4 3(b) Should System B be dropped and replaced with System C? The best option is to