Top managers of Movie Street 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 Movie Street 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.) Movie Street 106000 Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: 72000 Variable expenses 87000 Fixed expenses Total expected decrease in expenses Expected increase (decrease) in operating income 159000 (53000) Decision Drop DVDs. It is incorrect to conclude that dropping DVDs would add to operating income. If Movie Street drops the DVD product line, it will still incur $ 87000 in fixed expenses allocated to DVDs. Analysis DVDs Sales revenue. $ Total Blu-ray Discs 403,000 $ 297,000 $ 226,000 154,000 106,000 72,000 177,000 143,000 34,000 Variable expenses.. Contribution margin .. Fixed expenses: Manufacturing Marketing and administrative Total fixed expenses Operating income (loss).. 132,000 77,000 71,000 51,000 61,000 26,000 209,000 122,000 87,000 $ (32,000) $ 21,000 $ (53,000) re Print Done Requirement 2. Assume that Movie Street 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 Movie Street should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Movie Street Analysis of Dropping the DVD Product Line 106000 Expected decrease in revenues Expected decrease in expenses: Variable expenses 72000 Fixed expenses 61000 Total expected decrease in expenses 133000 (27000) Expected increase (decrease) in operating income Decision: Do not drop DVDs because the product's incremental revenues are less than its incremental costs. Requirement 3. Now, assume that $82,000 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 6%. What should the company do? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Movie Street 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: Movie Street should consider This would let Movie Street its operating income