AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that have radios, CD 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 are shown below:
System A System B Headset
Sales
Less variable expenses $ 45,000
20,000 $ 32,500
25,500 $ 8,000
3,200
Contribution margin
Less fixed costs* 25,000
10,000 7,000
18,000 4,800
2,700
Net income $ 15,000 $ (11,000) $ 2,100
*Includes common fixed costs totaling $18,000, currently 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 percent and sales of headsets will drop by 25 percent.
Required:
1. Prepare segmented income statement for the three products using a better format. [8 mrks]
2. Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should System B be dropped?
Question 4
Twombley Company manufactures three types of storage units. Each of the three types requires the use of a special machine that has total operating capacity of 10,000 hours per year. Information on the three types of storage units is as follows:
Basic Standard Deluxe
Selling price
Variable cost
Machine hours required $ 6.00
3.00
0.10 $ 15.00
7.00
0.25 $ 25.00
12.00
0.75
Twombley Company's marketing director has assessed demand for the three types of storage units and believes that the firm can sell as many units as it can produce.
Required:
1. How many of each type of unit should be produced and sold to maximize the company's contribution margin? What is the total contribution margin for your selection? [6 marks]
2. Now suppose that Twombley Company believes that it can sell no more than 30,000 of each of the three types at the prices estimated. What product mix would you recommend and what would be the total contribution margin? [3 marks]