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	$45,200	$32,700	$8,400
Less: Variable expenses	19,600	25,700	3,400
Contribution margin	$25,600	$7,000	$5,000
Less: Fixed costs *	10,200	17,900	2,500
Operating income (loss)	$15,400	$(10,900)	$2,500

*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 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

	System A	System B	Headset	Total

	$- Select -	$- Select -	$- Select -	$- Select -

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				- Select -

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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

	$- Select -	$- Select -	$- Select -

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2(b) Should system B be dropped?

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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

	$- Select -	$- Select -	$- Select -	$- Select -

	- Select -	- Select -	- Select -	- Select -

	$- Select -	$- Select -	$- Select -	$- Select -

	- Select -	- Select -	- Select -	- Select -

	$- Select -	$- Select -	$- Select -	$- Select -

				- Select -

$- Select -

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

The best option is to