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		$53,000		$ 32,500		$8,000
Less: Variable expenses		22,000		25,500		3,200
	Contribution margin	$31,000		$ 7,000		$4,800
Less: Fixed costs*		10,000		19,000		2,700
	Operating income	$21,000		$(12,000)		$2,100

* This includes common fixed costs totaling $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 37%, and sales of headsets will drop by 25%. (Note: Round all answers to the nearest whole number.)

Required:

1. Prepare segmented income statements for the three products. Round your answers to the nearest dollar. Use a minus sign to enter negative values.

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. Use a minus sign to enter negative values.

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.