Pharoah Toys' management is considering eliminating product A, which has been showing a loss for several years. The company's annual income statement, is as follows:

		A		B		C		Total
Sales		$2,213,000		$1,409,000		$1,802,900		$5,424,900
Variable expenses		1,652,000		601,700		1,084,300		3,338,000
Contribution margin		$561,000		$807,300		$718,600		$2,086,900
Advertising expense		$523,000		$430,000		$520,000		$1,473,000
Depreciation expense		16,700		10,500		20,300		47,500
Corporate expenses		94,300		84,900		105,200		284,400
Total fixed expenses		$634,000		$525,400		$645,500		$1,804,900
Operating income		$(73,000)		$281,900		$73,100		$282,000

Advertising expense - Specific to each product. Depreciation expense - Specific to each product; no other use available, no resale value. Corporate expenses - Allocated based on number of employees.

1. Restate the income statement in segment margin format.

2. What would be the effect on income if product A were dropped?

3. Management is considering making a new product using product A's equipment. If the new product's selling price per unit were $10, its variable costs were $5, and its advertising costs were the same as for product A, how many units of the new product would the company have to sell to make the switch from product A to the new product worthwhile?