Reference no: EM13576075

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		$55,000		$ 32,500		$8,000
Less: Variable expenses		22,000		25,500		3,200
	Contribution margin	$33,000		$ 7,000		$4,800
Less: Fixed costs*		10,000		20,000		2,700
	Operating income	$23,000		$(13,000)		$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 38%, and sales of headsets will drop by 25%. (Note: Round all answers to the nearest whole number.)

Required:

Hide 1. Prepare segmented income statements for the three products. Round your answers to the nearest dollar. Use a minus sign to enter negative values. AudioMart Segmented Income Statement System A System B Headset Total Sales $   $   $   $   Variable expenses Contribution margin $   $   $   $   Direct fixed cost Segment margin $   $   $   $   Common fixed cost Operating income $

1. Set up five columns. First column lists the income statement information. Second, third and fourth columns are for alternatives, and list all amounts. Fifth column is the differential amount to keep.

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. AudioMart Segmented Income Statement System A Headset Total Sales $   $   $   Variable expenses Contribution margin $   $   $   Direct fixed costs Segment margin $   $   $   Common fixed costs Operating income $

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.

AudioMart
Segmented Income Statement
		System A		System C		Headset		Total
Sales		$		$		$		$
Variable expenses
Contribution margin		$		$		$		$
Direct fixed cost
Segment margin		$		$		$		$
Common fixed cost
Operating income								$