Assignment
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
|
$ 45,000
|
$ 32,500
|
$ 8,000
|
|
Less: Variable expenses
|
20,000
|
25,500
|
3,200
|
|
Contribution margin
|
$25,000
|
$7,000
|
$4,800
|
|
Less: Fixed costs *
|
10,000
|
18,000
|
2,700
|
|
Operating income (loss)
|
$15,000
|
$(11,000)
|
$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 30%, and sales of headsets will drop by 25%. Round all answers to the nearest whole number.
Required:
1. Prepare segmented income statements for the three products using a better format.
2. CONCEPTUAL CONNECTION: Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped?
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. Should System B be dropped and replaced with System C?