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 ASYSTEM BHEADSET SALES$45,00032,5008,000 LESS: VARIABLE EXPENSE20,00025,5003,200 CONTRIBUTION MARGIN25,0007,0004,800 LESS: FIXED COSTS*10,00018,0002,700 OPERATING INCOME15,000-11,0002,100 * THIS INCLUDES COMMON FIXED COSTS TOTALING $18,000, ALLOCATED TO EACH PRODUCT IN PROPORTION TO ITS REVENUES.Required:Prepare segmented income statements for the three products, using a better format.CONCEPTUAL CONNECTION Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped?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?

An income statement stands for the statement that shows profits and loss of the firm, its revenue…

Answered: The store carries two portable sound…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 8E

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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 EXPENSE	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	15,000	-11,000	2,100

* THIS INCLUDES COMMON FIXED COSTS TOTALING $18,000, ALLOCATED TO EACH PRODUCT IN PROPORTION TO ITS REVENUES.

Required:

Prepare segmented income statements for the three products, using a better format.
CONCEPTUAL CONNECTION Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped?
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?

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