AudioMart is a retailer of vintage vinyl records and equipment. The store carries two popular sound systemsSystem 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	$45,300	$32,400	$8,100
Less: Variable expenses	19,600	25,300	3,600
Contribution margin	$25,700	$7,100	$4,500
Less: Fixed costs *	9,600	18,100	2,700
Operating income (loss)	$16,100	$(11,000)	$1,800

*This includes common fixed costs totaling $18,100, 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 32%, and sales of headsets will drop by 25%. 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
Contribution marginOperating incomeSalesSegment marginSales
Add: Variable expensesLess: Variable expensesLess: Variable expenses
Contribution marginDirect laborOperating incomeSegment marginContribution margin
Add: Direct fixed costLess: Direct fixed costLess: Direct fixed cost
Contribution marginDirect laborSalesSegment marginSegment margin
Add: Common fixed costLess: Common fixed costLess: Common fixed cost
Contribution marginDirect laborOperating incomeSalesOperating income

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
Contribution marginOperating incomeSalesSegment marginSales
Add: Variable expensesLess: Variable expensesLess: Variable expenses
Contribution marginDirect laborOperating incomeSegment marginContribution margin
Add: Direct fixed costLess: Direct fixed costLess: Direct fixed cost
Contribution marginDirect laborSalesSegment marginSegment margin
Add: Common fixed costLess: Common fixed costLess: Common fixed cost
Contribution marginDirect laborOperating incomeSalesOperating income

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
Contribution marginOperating incomeSalesSegment marginSales
Add: Variable expensesLess: Variable expensesLess: Variable expenses
Contribution marginDirect laborOperating incomeSegment marginContribution margin
Add: Direct fixed costLess: Direct fixed costLess: Direct fixed cost
Contribution marginDirect laborSalesSegment marginSegment margin
Add: Common fixed costLess: Common fixed costLess: Common fixed cost
Contribution marginDirect laborOperating incomeSalesOperating income