Reference no: EM133145080
Question - 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 $19 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
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System B
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Headset
|
|
Sales
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$44,600
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$32,400
|
$8,100
|
|
Less: Variable expenses
|
19,800
|
25,400
|
2,900
|
|
Contribution margin
|
$24,800
|
$7,000
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$5,200
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|
Less: Fixed costs *
|
10,000
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17,500
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2,600
|
|
Operating income (loss)
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$14,800
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$(10,500)
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$2,600
|
* This includes common fixed costs totaling $17,500, 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 32%, and sales of headsets will drop by 26%. 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?