Top managers of Entertainment Plus 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 Entertainment Plus 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.) Entertainment Plus 0 Analysis - Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: Blu-ray Variable expenses Total Discs DVDs Fixed expenses Sales revenue $ 429,000 $ 305.000 $ 124.000 Total expected decrease in expenses Variable expenses 233,000 151,000 82.000 Expected increase (decrease) in operating income Contribution margin 196,000 154,000 42.000 Decision: DVDs. It is to conclude that dropping DVDs would add to operating income. If Entertainment Plus drops the DVD product line, it incurs Fixed expenses: Manufacturing 115,000 68,000 47.000 Requirement 2. Assume that Entertainment Plus can avoid $31.000 of fixed expenses by dropping the DVD product line. (These costs are direct fixed costs of the DVD product line.) Prepa parentheses or a minus sign to enter a decrease in operating income.) 87.000 56,000 31.000 Marketing and administrative 202.000 124,000 78,000 Entertainment Plus Total fixed expenses $ 30,000 $ (6.000) S Analysis of Dropping the DVD Product Line (36,000) Operating income (loss) Expected decrease in revenues Expected decrease in expenses Print Done Variable expenses Requirement 2. Assume that Entertainment Plus can avoid $31,000 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 Entertainment Plus should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Entertainment Plus 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 $72,000 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 8%. What should the company do? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Entertainment Plus 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 Lost contribution margin on Blu-ray discs Net expected increase (decrease) in operating income Decision: Entertainment Plus should consider This would let Entertainment Plus its operating income
