Q11. (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 Headset $8,000 $45,000 20,000 3,200 $25,000 $4,800 10,000 2,700 $15,000 $2,100 *This includes common fixed costs totaling $18,000, allocated to each product in proportion to its revenues. System B $ 32,500 25,500 $ 7,000 18,000 $(11,000) Sales Less: Variable expenses Contribution margin Less: Fixed costs* Operating income 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 percent, and sales of headsets will drop by 25 percent. (Note: Round all answers to the nearest whole number.) Required: 1. Prepare segmented income statements for the three products using a better format. 2. Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped? 3. 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 percent of the revenues of B, and sales of the headsets would drop by 10 percent. The contribution margin ratio of C is 50 percent, and its direct fixed costs would be identical to those of B. Should System B be dropped and replaced with System C?
Q11. (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 Headset $8,000 $45,000 20,000 3,200 $25,000 $4,800 10,000 2,700 $15,000 $2,100 *This includes common fixed costs totaling $18,000, allocated to each product in proportion to its revenues. System B $ 32,500 25,500 $ 7,000 18,000 $(11,000) Sales Less: Variable expenses Contribution margin Less: Fixed costs* Operating income 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 percent, and sales of headsets will drop by 25 percent. (Note: Round all answers to the nearest whole number.) Required: 1. Prepare segmented income statements for the three products using a better format. 2. Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped? 3. 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 percent of the revenues of B, and sales of the headsets would drop by 10 percent. The contribution margin ratio of C is 50 percent, and its direct fixed costs would be identical to those of B. Should System B be dropped and replaced with System C?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Q11. (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
$45,000
Headset
$8,000
3,200
20,000
$25,000
$4,800
2,700
10,000
$15,000
$2,100
*This includes common fixed costs totaling $18,000, allocated to each product in proportion to its revenues.
System B
$ 32,500
25,500
$ 7,000
18,000
$(11,000)
Sales
Less: Variable expenses
Contribution margin
Less: Fixed costs*
Operating income
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 percent, and sales of headsets will drop by 25 percent.
(Note: Round all answers to the nearest whole number.)
Required:
1. Prepare segmented income statements for the three products using a better format.
2. Prepare segmented income statements for System A and the headsets
assuming that System B is dropped. Should B be dropped?
3. 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 percent of the revenues of B, and sales
of the headsets would drop by 10 percent. The contribution margin ratio of C is 50 percent, and its direct fixed costs
would be identical to those of B. Should System B be dropped and replaced with System C?
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