Keep or Drop AudioMart is a retailer of radios, stereos, and televisions. The store carries two...
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 | 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.
Required:
1. Prepare segmented income statements for the three products. Round your answers to the nearest dollar. Input expenses as positive numbers.
| AudioMart | ||||
| Segmented Income Statement | ||||
| System A, System B, and Headset | ||||
| System A | System B | Headset | Total | |
|
*Choices* Contribution Margin Operating Income Sales Segment Margin |
$ | $ | $ | $ |
|
*Choices* Add Variable Expenses Less Variable Expenses |
||||
|
*Choices* Contribution Margin Direct Labor Operating Income Segment Margin |
$ | $ | $ | $ |
|
*Choices* Add Direct fixed cost Less Direct fixed cost |
||||
|
*Choices* Contribution Margin Direct Labor Sales Segment Margin |
$ | $ | $ | $ |
|
*Choices* Add common fixed cost Less common fixed cost |
||||
|
*Choices* Contribution Margin Direct Labor Sales Operating Income |
$ | |||
2(a) Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Round your answers to the nearest dollar. Input expenses as positive numbers. (Note: Be sure to complete 2(b) below the statement.)
| AudioMart | |||
| Segmented Income Statement | |||
| System A and Headset | |||
| System A | Headset | Total | |
|
*Choices* Contribution Margin Operating Income Sales Segment Margin |
$ | $ | $ |
|
*Choices* Add Variable Expenses Less Variable Expenses |
|||
|
*Choices* Contribution Margin Direct Labor Operating Income Segment Margin |
$ | $ | $ |
|
*Choices* Add Direct fixed cost Less Direct fixed cost |
|||
|
*Choices* Contribution Margin Direct Labor Sales Segment Margin |
$ | $ | $ |
|
*Choices* Add common fixed costs Less common fixed costs |
|||
|
*Choices* Contribution Margin Direct Labor Sales Operating Income |
$ | ||
2(b) Should system B be dropped?
A. Yes B. No
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. Round your answers to the nearest dollar. Input expenses as positive numbers. (Note: Be sure to complete 3(b) below the statement.)
| AudioMart | ||||
| Segmented Income Statement | ||||
| System A, System C, and Headset | ||||
| System A | System C | Headset | Total | |
|
*Choices* Contribution Margin Operating Income Sales Segment Margin |
$ | $ | $ | $ |
|
*Choices* Add variable expenses Less variable expenses |
||||
|
*Choices* Contribution Margin Direct Labor Operating Income Segment Margin |
$ | $ | $ | $ |
|
*Choices* Add Direct Fixed Cost Less Direct Fixed Cost |
||||
|
*Choices* Contribution Margin Direct Labor Sales Segment Margin |
$ | $ | $ | $ |
|
*Choices* Add Common fixed cost Less Common fixed cost |
||||
|
*Choices* Contribution Margin Direct Labor Sales Operating Income |
$ | |||
3(b) Should System B be dropped and replaced with System C?
The best option is to
A) Keep B
B) Drop B without replacing C
C) Replace C with B
Homework Answers
|
Product A |
System B |
Headset |
Total |
|
|
Sales |
$45,000 |
$32,500 |
$8,000 |
$85,500 |
|
Less:Variable expenses |
20,000 |
25,500 |
3,200 |
48,700 |
|
Contribution margin |
25,000 |
7,000 |
4,800 |
36,800 |
|
Less:Traceable fixed cost |
526 |
11,158 |
1,016 |
12,700 |
|
Segment profit |
24,474 |
(4,158) |
3,784 |
24,100 |
|
Less:Allocated fixed cost |
18,000 |
|||
|
Net income |
$6,100 |
45,000/$85,500 × $18,000 = $9,474; $10,000 – $9,474 = $526.
$32,500/$85,500 × $18,000 = $6,842; $18,000 – $6,842 = $11,158.
$8,000/$85,500 × $18,000 = $1,684; $2,700 – $1,684 = $1,016.
|
System A |
Headset |
total |
|
|
Sales |
$58,500 |
$6,000 |
$64,500 |
|
Less:Variable expense |
26,000 |
2,400 |
28,400 |
|
Contribution margin |
32,500 |
3,600 |
36,100 |
|
Less:Traceable cost |
526 |
1,016 |
1,542 |
|
Segment margin |
31,974 |
2,584 |
34,558 |
|
Common fixed cost |
18,000 |
||
|
Net income |
16,558 |
||
|
System A |
System c |
Headset |
total |
|
|
Sales |
45,000 |
26,000 |
7,200 |
78,200 |
|
Variable expense |
20,000 |
13,000 |
2,880 |
35,880 |
|
Contribution margin |
25,000 |
13,000 |
4,320 |
42,320 |
|
Tracebale fixed cost |
526 |
11,158 |
1,016 |
12,700 |
|
Segment margin |
24,474 |
1842 |
3,034 |
29,620 |
|
Common fixed cost |
18,000 |
|||
|
Net income |
11,620 |
Replacing B with C is better than keeping B, but not as good as dropping B without replacement with C because operating income of $11,620 increases from $6,100, but is lower than $16,558.
Add Answer to:
Keep or Drop
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