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1 Data Table Entertainment Plus Product Line Contribution Margin Income Statement For the Year Product lines Blu-ray Discs DVDs Company Total Sales revenue $ 300,000 $ 136,000 $ 436,000 Less: Variable expenses 154,000 86,000 240,000 Contribution margin 146,000 $ 50,000 $ 196,000 Less fixed expenses: Manufacturing 79,000 53,000 132,000 Marketing and administrative 54,000 15,000 69,000 $ Operating income (loss) 13,000 $ (18,000) $ (5,000) Print Done Requirement 1. Prepare an incremental analysis to show whether Entertainment Plus should discontinue the DVD product line. Will discontinuing DVDs add $18,000 to operating income? Explain. (Enter a "0" in an input box if there is no expected change as a result of discontinuing DVDs is this scenario.) Incremental Analysis for Discontinuation Decision Total Contribution margin lost if DVDs are discontinued 50,000 Less: Fixed cost savings if DVDs are discontinued Operating income lost if DVDs are discontinued 50,000 Decision: Do not discontinue DVDs. It is incorrect to conclude that discontinuing DVDs would add $18,000 to operating income. If the company discontinues the DVD product line, it will still incur fixed expenses allocated to DVDs. Total Requirement 2. Assume that the company can avoid $21,000 of fixed expenses by discontinuing the DVD product line (these costs are direct fixed costs of the DVD product line). Prepare an incremental analysis to show whether the company should stop selling DVDs. (Enter a "0" in an input box if there is no expected change as a result of discontinuing DVDs is this scenario.) Incremental Analysis for Discontinuation Decision Contribution margin lost if DVDs are discontinued 50,000 Less: Fixed cost savings if DVDs are discontinued 21,000 Operating income lost if DVDs are discontinued 29,000 Decision: Discontinue DVDs because, assuming $21,000 of fixed expenses attributable to the DVD product line can be avoided, the loss of contribution margin is now less than the fixed cost savings. Requirement 3. Now, assume that all of the fixed costs assigned to DVDs are direct fixed costs and can be avoided if the company stops selling DVDs. However, marketing has concluded that Blu-ray disc sales would be adversely affected by discontinuing the DVD line (retailers want to buy both from the same supplier). Blu-ray disc production and sales would decline 10%. What should the company do? Prepare an incremental analysis. (Enter a "0" in an input box if there is no expected change as a result of discontinuing DVDs is this scenario.) Incremental Analysis for Discontinuation Decision Total DVD contribution margin lost if DVDs are discontinued 50,000 Blu-Ray contribution margin lost if DVDs are discontinued 14,600 Less: Fixed cost savings if DVDs are discontinued 68,000 Operating income gained if DVDs are discontinued (3,400) Decision: Discontinue DVDs because, assuming that all fixed costs assigned to the DVD product line can be avoided but that Blu-ray production and sales would decline 10%, the loss of contribution margin will still exceed the fixed cost savings