1. AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that have radios, CD 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		$15,000			$(11,000)			$2,100

   *This includes common fixed costs totalling $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. (Note: Round all answers to the nearest whole number.)

   Required:

   1. Prepare segmented income statements for the three products. Round your answers to the nearest dollar. Use a minus sign to enter negative values.

   AudioMart Segmented Income Statement

   	System A	System B	Headset	Total
   Sales	$fill in the blank 7a28a902d069029_1	$fill in the blank 7a28a902d069029_2	$fill in the blank 7a28a902d069029_3	$fill in the blank 7a28a902d069029_4
   Variable expenses	fill in the blank 7a28a902d069029_5	fill in the blank 7a28a902d069029_6	fill in the blank 7a28a902d069029_7	fill in the blank 7a28a902d069029_8
   Contribution margin	fill in the blank 7a28a902d069029_9	fill in the blank 7a28a902d069029_10	fill in the blank 7a28a902d069029_11	fill in the blank 7a28a902d069029_12
   Direct fixed cost	fill in the blank 7a28a902d069029_13	fill in the blank 7a28a902d069029_14	fill in the blank 7a28a902d069029_15	fill in the blank 7a28a902d069029_16
   Segment margin	$fill in the blank 7a28a902d069029_17	$fill in the blank 7a28a902d069029_18	$fill in the blank 7a28a902d069029_19	fill in the blank 7a28a902d069029_20
   Common fixed cost				fill in the blank 7a28a902d069029_21
   Operating income				$fill in the blank 7a28a902d069029_22

   2. Conceptual Connection: Prepare segmented income statements for system A and the headsets assuming that system B is dropped. Round your answers to the nearest dollar. Use a minus sign to enter negative values.

   AudioMart Segmented Income Statement

   	System A	Headset	Total
   Sales	$fill in the blank 280514f8df9805e_1	$fill in the blank 280514f8df9805e_2	$fill in the blank 280514f8df9805e_3
   Variable expenses	fill in the blank 280514f8df9805e_4	fill in the blank 280514f8df9805e_5	fill in the blank 280514f8df9805e_6
   Contribution margin	fill in the blank 280514f8df9805e_7	fill in the blank 280514f8df9805e_8	fill in the blank 280514f8df9805e_9
   Direct fixed costs	fill in the blank 280514f8df9805e_10	fill in the blank 280514f8df9805e_11	fill in the blank 280514f8df9805e_12
   Segment margin	$fill in the blank 280514f8df9805e_13	$fill in the blank 280514f8df9805e_14	fill in the blank 280514f8df9805e_15
   Common fixed costs			fill in the blank 280514f8df9805e_16
   Operating income			$fill in the blank 280514f8df9805e_17

   Should system B be dropped?

   YesNo

   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 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.

   AudioMart Segmented Income Statement

   	System A	System C	Headset	Total
   Sales	$fill in the blank 92bb5afcb06d01b_1	$fill in the blank 92bb5afcb06d01b_2	$fill in the blank 92bb5afcb06d01b_3	$fill in the blank 92bb5afcb06d01b_4
   Variable expenses	fill in the blank 92bb5afcb06d01b_5	fill in the blank 92bb5afcb06d01b_6	fill in the blank 92bb5afcb06d01b_7	fill in the blank 92bb5afcb06d01b_8
   Contribution margin	fill in the blank 92bb5afcb06d01b_9	fill in the blank 92bb5afcb06d01b_10	fill in the blank 92bb5afcb06d01b_11	fill in the blank 92bb5afcb06d01b_12
   Direct fixed cost	fill in the blank 92bb5afcb06d01b_13	fill in the blank 92bb5afcb06d01b_14	fill in the blank 92bb5afcb06d01b_15	fill in the blank 92bb5afcb06d01b_16
   Segment margin	$fill in the blank 92bb5afcb06d01b_17	$fill in the blank 92bb5afcb06d01b_18	$fill in the blank 92bb5afcb06d01b_19	fill in the blank 92bb5afcb06d01b_20
   Common fixed cost				fill in the blank 92bb5afcb06d01b_21
   Operating income				$fill in the blank 92bb5afcb06d01b_22

   Should system B be dropped and replaced with system C?

   The best choice is

   Replacing system B with system CDropping system B without replacement with system CKeeping system B

   .

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