AudioMart is a retailer of vintage vinyl records and equipment. The store carries two popular sound systems$$System A and System B$.$ System A$,$ of slightly higher quality than System B$,$ costs $$18$ more. With rare exceptions, the store also sells a specialized headset when a system is sold. The headset can be used with either system. Variable$-$costing income statements for the three products follow:

Line Item Description System A System B Headset

Sales $$44,800$ $$32,900$ $$8,300$

Less: Variable expenses $20,40025,1003,100$

Contribution margin $$24,400$ $$7,800$ $$5,200$

Less: Fixed costs $*9,70017,7002,500$

Operating income $($loss$)$ $$14,700$ $$(9,900)$ $$2,700$

$*$This includes common fixed costs totaling $$17,700,$ 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 $28\%,$ and sales of headsets will drop by $24\%.$ Round all answers to the nearest whole number.

Required:

Question Content Area

$1.$ Prepare segmented income statements for the three products. Round your answers to the nearest dollar. Input expenses as positive numbers.

AudioMart

Segmented Income Statement

System A$,$ System B$,$ and Headset

Line Item Description System A System B Headset Total

Sales

$Sales

$44,800$

$Sales

$32,900$

$Sales

$8,300$

$Sales

$86,000$

Less: Variable expenses

Less: Variable expenses

$20,400$

Less: Variable expenses

$25,100$

Less: Variable expenses

$3,100$

Less: Variable expenses

$48,600$

Contribution margin

$Contribution margin

$24,400$

$Contribution margin

$7,800$

$Contribution margin

$5,200$

$Contribution margin

$37,400$

Less: Direct fixed cost

Less: Direct fixed cost

$27,400$

Less: Direct fixed cost

$17,700$

Less: Direct fixed cost

$2,500$

Less: Direct fixed cost

$29,900$

Segment margin

$Segment margin

$14,700$

$Segment margin

$-9,900$

$Segment margin

$2,700$

$Segment margin

$7,500$

Less: Common fixed cost

Less: Common fixed cost

$17,700$

Operating income

$Operating income

$191,700$

Feedback Area

Feedback

Partially correct

Question Content Area

$2($a$)$ 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. Input expenses as positive numbers. $($Note: Be sure to complete $2($b$)$ below the statement.$)$

AudioMart

Segmented Income Statement

System A and Headset

Line Item Description System A Headset Total

Sales

$Sales

$Sales

$Sales

Less: Variable expenses

Less: Variable expenses

Less: Variable expenses

Less: Variable expenses

Contribution margin

$Contribution margin

$Contribution margin

$Contribution margin

Less: Direct fixed cost

Less: Direct fixed cost

Less: Direct fixed cost

Less: Direct fixed cost

Segment margin

$Segment margin

$Segment margin

$Segment margin

Less: Common fixed cost

Less: Common fixed cost

Operating income

$Operating income

Feedback Area

Feedback

Partially correct

Question Content Area

$2($b$)$ Should system B be dropped?

Yes

Feedback Area

Feedback

Correct

Question Content Area

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$.$

$3($a$)$ Prepare segmented income statements for System A$,$ System C and the headsets. 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

Line Item Description System A System C Headset Total

Sales

$Sales

$Sales

$Sales

$Sales

Less: Variable expenses

Less: Variable expenses

Less: Variable expenses

Less: Variable expenses

Less: Variable expenses

Contribution margin

$Contribution margin

$Contribution margin

$Contribution margin

$Contribution margin

Less: Direct fixed cost

Less: Direct fixed cost

Less: Direct fixed cost

Less: Direct fixed cost

Less: Direct fixed cost

Segment margin

$Segment margin

$Segment margin

$Segment margin

$Segment margin

Less: Common fixed cost

Less: Common fixed cost

Operating income

$Operating income

Feedback Area

Feedback

Partially correct

Question Content Area

$3($b$)$ Should System B be dropped and replaced with System C$?$