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Category > Accounting Posted 19 Aug 2017 My Price 12.00

portable sound systems

Problem 13-42  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

$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 head- sets will drop by 25%. (Note: 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?

Answers

Maurice Tutor
(5)
Status NEW Posted 19 Aug 2017 05:08 PM My Price 12.00

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