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 $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.

Refer to the list below for the exact wording of an amount description within your income statement.

Amount Descriptions
Add: Common fixed cost
Add: Direct fixed cost
Add: Variable expenses
Contribution margin
Less: Common fixed cost
Less: Direct fixed cost
Less: Variable expenses
Operating income
Operating loss
Sales
Segment margin

	Required:
1.	1. Prepare segmented income statements for the three products. Refer to the list of Amount Descriptions for the exact wording of text items within your income statement. Round your answers to the nearest dollar. Input expenses as positive numbers.
2.	2(a) Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Refer to the list of Amount Descriptions for the exact wording of text items within your income statement. Round your answers to the nearest dollar. Input expenses as positive numbers.
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% 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. 3(a) Prepare segmented income statements for System A, System C and the headsets. Refer to the list of Amount Descriptions for the exact wording of text items within your income statement. Round your answers to the nearest dollar. Input expenses as positive numbers.

Answer 1

Segmented Income Statement
	System A	System B	Headset	Total
Sales	45,000.00	32,500.00	8,000.00	85,500.00
Less: Variable expenses	20,000.00	25,500.00	3,200.00	48,700.00
Contribution margin	25,000.00	7,000.00	4,800.00	36,800.00
Less: Direct fixed cost	526.32	11,157.89	1,015.79	12,700.00
Segment margin	24,473.68	(4,157.89)	3,784.21	24,100.00
Less: Common fixed cost				18,000.00
Operating income				6,100.00
2a.
Segmented Income Statement
	System A	Headset	Total
Sales	58,500.00	6,000.00	64,500.00
Less: Variable expenses	26,000.00	2,400.00	28,400.00
Contribution margin	32,500.00	3,600.00	36,100.00
Less: Direct fixed cost	526.32	1,015.79	1,542.11
Segment margin	31,973.68	2,584.21	34,557.89
Less: Common fixed cost			18,000.00
Operating income			16,557.89
3
	System A	System C	Headset	Total
Sales	45,000.00	26,000.00	7,200.00	78,200.00
Less: Variable expenses	20,000.00	13,000.00	2,880.00	35,880.00
Contribution margin	25,000.00	13,000.00	4,320.00	42,320.00
Less: Direct fixed cost	526.32	11,157.89	1,015.79	12,700.00
Segment margin	24,473.68	1,842.11	3,304.21	29,620.00
Less: Common fixed cost				18,000.00
Operating income				11,620.00