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Keep or Drop

AudioMart is a retailer of vintage vinyl records and equipment. The store carries two popular sound systems$$System A and System B$.$ System A$,$ of slightly higher quality than System B$,$ costs $$21$ 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 $$45,500$ $$32,600$ $$8,400$

Less: Variable expenses $20,50025,8002,900$

Contribution margin $$25,000$ $$6,800$ $$5,500$

Less: Fixed costs $*10,20017,5002,600$

Operating income $($loss$)$ $$14,800$ $$(10,700)$ $$2,900$

$*$This includes common fixed costs totaling $$17,500,$ 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 $29\%,$ and sales of headsets will drop by $24\%.$ Round all answers to the nearest whole number.

Required:

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$1.$ 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

$45,500$

$Sales

$32,600$

$Sales

$8,400$

$Sales

$86,500$

Less: Variable expenses

Less: Variable expenses

$20,500$

Less: Variable expenses

$25,800$

Less: Variable expenses

$2,900$

Less: Variable expenses

$49,200$

Contribution margin

$Contribution margin

$25,000$

$Contribution margin

$6,800$

$Contribution margin

$5,500$

$Contribution margin

$37,300$

Less: Direct fixed cost

Less: Direct fixed cost

$995$

Less: Direct fixed cost

$10,905$

Less: Direct fixed cost

$901$

Less: Direct fixed cost

$12,801$

Segment margin

$Segment margin

$24,005$

$Segment margin

$-4,105$

$Segment margin

$4,599$

$Segment margin

$24,499$

Less: Common fixed cost

Less: Common fixed cost

$17,500$

Operating income

$Operating income

$6,999$

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Correct

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$2($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

$58,695$

$Sales

$6,384$

$Sales

Less: Variable expenses

Less: Variable expenses

$26,445$

Less: Variable expenses

$2,900$

Less: Variable expenses

Contribution margin

$Contribution margin

$32,250$

$Contribution margin

$3,484$

$Contribution margin

Less: Direct fixed cost

Less: Direct fixed cost

$995$

Less: Direct fixed cost

$2,600$

Less: Direct fixed cost

Segment margin

$Segment margin

$31,255$

$Segment margin

$884$

$Segment margin

Less: Common fixed cost

Less: Common fixed cost

$17,500$

Operating income

$Operating income

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Feedback

Partially correct

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

Yes

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Correct

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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

$58,695$

$Sales

$26,080$

$Sales

$7,560$

$Sales

Less: Variable expenses

Less: Variable expenses

$26,445$

Less: Variable expenses

$13,040$

Less: Variable expenses

$2,900$

Less: Variable expenses

Contribution margin

$Contribution margin

$32,250$

$Contribution margin

$13,040$

$Contribution margin

$4,660$

$Contribution margin

Less: Direct fixed cost

Less: Direct fixed cost

$995$

Less: Direct fixed cost

$17,500$

Less: Direct fixed cost

$2,600$

Less: Direct fixed cost

Segment margin

$Segment margin

$31,255$

$Segment margin

$4,460$

$Segment margin

$2,060$

$Segment margin

Less: Common fixed cost

Less: Common fixed cost

$17,500$

Operating income

$Operating income

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Feedback

Partially correct

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