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 $45,500 $ 32,500 $8,000 Less: Variable expenses 22,000 25,500 3,200 Contribution margin $23,500 $ 7,000 $4,800 Less: Fixed costs* 10,000 19,000 2,700 Operating income $13,500 $(12,000) $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 40%, 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. AudioMart Segmented Income Statement System A System B Headset Total Sales 45,500 32,500 8,000 $ 86,000 Variable expenses 22,000 25,500 3,200 50,700 Contribution margin 23,500 7,000 $ 4,800 $ 35,300 Direct fixed cost -477 x -12,198 X -1,026 X 13,700 Segment margin 23,023 x -5,198 x 3,774 X 21,600 Common fixed cost - 18,000 Operating income $ 3,600 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. AudioMart Segmented Income Statement System A Headset Total Sales 63,700 6,000 $ 69,700 Variable expenses 30,800 2,400 33,200 Contribution margin $ 32,900 $ 3,600 $ 36,500 Direct fixed costs 477 X 1,026 X 1,502 X Segment margin $32,423 32,423 X $ 2,574 x 34,998 X Common fixed costs 18,000 Operating income 16,998 X Should B be dropped? Yes Hint(s) 3. Conceptual Connection: Suppose that a third system, System C, with a similar quality to System B, could be acquired. Assume that with 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. If required, round your answers to the nearest dollar. AudioMart Segmented Income Statement System A System C Headset Total Sales 45,500 $ 26,000 $ 7,200 $ 78,700 Variable expenses 22,000 13,000 2,880 37,880 Contribution margin 23,500 $ 13,000 4,320 40,820 Direct fixed cost -477 - 12,198 -1,026 X 13,700 23.023 Y 802 3 294 Common fixed costs 18,000 Operating income 16,998 x Should B be dropped? Yes Hint(s) 3. Conceptual Connection: Suppose that a third system, System C, with a similar quality to System B, could be acquired. Assume that with 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. If required, round your answers to the nearest dollar. AudioMart Segmented Income Statement System A System C Headset Total Sales 45,500 $ 26,000 $ 7,200 78,700 Variable expenses 22,000 | 1 13,000 2,880 37,880 Contribution margin $ 23,500 $ 13,000 $ 4,320 $ 40,820 Direct fixed cost -477 X - 12.198 X -1,026 x 13,700 Segment margin 23,023 X $ 802 x $ 3,294 X 27,120 Common fixed cost 18,000 Operating income 9,120 Hint(s) Hint(s) Should System B be dropped and replaced with System C? The best choice is Dropping system B without replacement with system CV Hint(s)
