Top managers of Canada Video 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 Canada Video 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.) Canada Video Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: Variable expenses Fixed expenses Total expected decrease in expenses Expected increase (decrease) in operating income Decision: It is to conclude that dropping DVDs would add to operating income. If the company drops the DVD product line, it incur $ in fixed expenses allocated to DVDs. Sales revenue Variable expenses Blu-ray Total Discs DVDs $ 445,000 $ 305,000 $ 140,000 244,000 156,000 88,000 201,000 149,000 52,000 Contribution margin Fixed expenses: Manufacturing 117,000 72,000 45,000 Marketing and administrative 89,000 55,000 34,000 206,000 127,000 79,000 Total fixed expenses (5,000) $ 22,000 $ (27,000) Operating income (loss) Requirement 2. Assume that Canada Video can avoid $34,000 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 Canada Video should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Canada Video Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: Variable expenses Fixed expenses Total expected decrease in expenses Expected increase (decrease) in operating income Decision: because the product's incremental revenues its incremental costs. Requirement 3. Now, assume that all $79,000 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