Keep or Drop 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: System A System B Headset Sales $47,500 $ 32,500 $8,000 Less: Variable expenses 22,000 25,500 3,200 Contribution margin $25,500 $ 7,000 $4,800 Less: Fixed costs* 10,000 21,000 2,700 Operating income $15,500 $(14,000) $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 42%, and sales of headsets will drop by 25%.

Required: 1. Prepare segmented income statements for the three products. For the allocation of the common fixed costs, compute the percentage of revenue first (in the order of the mathematical operations). In your computations, round any division to two decimal places and use rounded amounts in subsequent computations. Then, round your final answers to the nearest dollar.

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.

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.