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 $18 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	$44,800	$32,000	$7,900
Less: Variable expenses	20,200	25,700	3,400
Contribution margin	$24,600	$6,300	$4,500
Less: Fixed costs *	10,100	17,900	2,700
Operating income (loss)	$14,500	$(11,600)	$1,800

*This includes common fixed costs totaling $17,900, 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 26%. 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

	System A	System B	Headset	Total
Contribution marginOperating incomeSalesSegment margin	$- Select -	$- Select -	$- Select -	$- Select -
Add: Variable expensesLess: Variable expenses	- Select -	- Select -	- Select -	- Select -
Contribution marginDirect laborOperating incomeSegment margin	$- Select -	$- Select -	$- Select -	$- Select -
Add: Direct fixed costLess: Direct fixed cost	- Select -	- Select -	- Select -	- Select -
Contribution marginDirect laborSalesSegment margin	$- Select -	$- Select -	$- Select -	$- Select -
Add: Common fixed costLess: Common fixed cost				- Select -
Contribution marginDirect laborOperating incomeSales				$- Select -

Question Content Area

2(a) 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

	System A	Headset	Total
Contribution marginOperating incomeSalesSegment margin	$- Select -	$- Select -	$- Select -
Add: Variable expensesLess: Variable expenses	- Select -	- Select -	- Select -
Contribution marginDirect laborOperating incomeSegment margin	$- Select -	$- Select -	$- Select -
Add: Direct fixed costLess: Direct fixed cost	- Select -	- Select -	- Select -
Contribution marginDirect laborSalesSegment margin	$- Select -	$- Select -	$- Select -
Add: Common fixed costLess: Common fixed cost			- Select -
Contribution marginDirect laborOperating incomeSales			$- Select -

Question Content Area

2(b) Should system B be dropped?

YesNo

Question Content Area

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

	System A	System C	Headset	Total
Contribution marginOperating incomeSalesSegment margin	$- Select -	$- Select -	$- Select -	$- Select -
Add: Variable expensesLess: Variable expenses	- Select -	- Select -	- Select -	- Select -
Contribution marginDirect laborOperating incomeSegment margin	$- Select -	$- Select -	$- Select -	$- Select -
Add: Direct fixed costLess: Direct fixed cost	- Select -	- Select -	- Select -	- Select -
Contribution marginDirect laborSalesSegment margin	$- Select -	$- Select -	$- Select -	$- Select -
Add: Common fixed costLess: Common fixed cost				- Select -
Contribution marginDirect laborOperating incomeSales				$- Select -

Question Content Area

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

The best option is to

keep B, drop B without replacing with C, replace C with B

.