Top managers of City 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. Total fixed costs will not change if the company stops selling DVDs$.$

Total

Blu$-$ray Discs

DVDs

Sales revenue................................................

$$428,000$

$$308,000$

$$118,000$

Variable expenses..........................................

$238,000$

$150,000$

$87,000$

Contribution margin........................................

$190,000$

$158,000$

$31,000$

Fixed expenses:.............................................

$$Manufacturing$.............................................$

$133,000$

$76,000$

$56,000$

$$Marketing and administrative.....................

$65,000$

$54,000$

$11,000$

$$Total fixed expenses..................................

$198,000$

$130,000$

$67,000$

Operating income $($loss$)................................$

$$(8,000)$

$$28,000$

$ $(36,000)$

Requirements

Prepare an incremental analysis to show whether City Video should drop the DVD product line. Will dropping the DVDs add $$36,000$ to operating income? Explain.

Assume that City Video can avoid $$36,000$ 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 City Video should stop selling DVDs$.$

Now, assume that all $$67,000$ 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$?$