Please help to answer the below question.
Top managers of Movies and More are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to help make this decision. (Click the icon to view the analysis.) Total fixed costs will not change if the company stops selling DVDs. Requirements Requirement 1. Prepare an incremental analysis to show whether Movies and More should drop the DVD product line. Will dropping DVDs add to operating income? Explain. (Use parentheses or a minus sign to enter a decrease in operating income.) Movies and More Analysis of Dropping the DVD Product Line Expected decrease in revenues $ 115,000 Expected decrease in expenses: Variable expenses $ 76,000 Fixed expenses Total expected decrease in expenses 76,000 Expected increase (decrease) in operating income $ (39,000 Decision: Do not drop DVDs . It is incorrect to conclude that dropping DVDs would add to operating income. If the company drops the DVD product line, it will still incur $ 85,000 in fixed expenses allocated to DVDs. Requirement 2. Assume that Movies and More can avoid $26,000 of fixed expenses by dropping the DVD product line. (These costs are direct fixed costs of the DVD product line.) Prepare an incremental analysis to show whether Movies and More should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Movies and More Analysis of Dropping the DVD Product Line Expected decrease in revenues $ 115,000 Expected decrease in expenses: Variable expenses $ 76,000 Fixed expenses 26,000 Total expected decrease in expenses 102,000 Expected increase (decrease) in operating income $ (13,000) Decision: Do not drop DVDs because the product's incremental revenues exceed its incremental costs.Requirement 3. Now, assume that all $85,000 of 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. (Use parentheses or a minus sign to enter a decrease in operating income.) Movies and More Analysis of Dropping the DVD Product Line Expected decrease revenues 145300 Expected decrease in expenses: Variable expenses 91500 Fixed expenses 85000 Total expected decrease in expenses 176500 Expected increase (decrease) in operating income 31200 Lost contribution margin on Blu-ray discs Net expected increase (decrease) in operating incomeAnalysis X Blu-ray Total Discs DVDS Sales revenue. . . . . $ 418,000 $ 303,000 $ 115,000 Variable expenses . . 231,000 155,000 76,000 Contribution margin 187,000 148,000 39,000 Fixed expenses: Manufacturing 135,000 76,000 59,000 Marketing and administrative 79,000 53,000 26,000 Total fixed expenses 214,000 129,000 85,000 Operating income (loss) . . . . . . (27,000) $ 19,000 $ (46,000) Print Donei Requirements X 1. Prepare an incremental analysis to show whether Movies and More should drop the DVD product line. Will dropping DVDs add to operating income? Explain. 2. Assume that Movies and More can avoid $26,000 of fixed expenses by dropping the DVD product line. (These costs are direct fixed costs of the DVD product line.) Prepare an incremental analysis to show whether Movies and More should stop selling DVDs. 3. Now, assume that all $85,000 of 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? Print Done
