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. 5(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.) Analysis 115000 Movies and More Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: Variable expenses 76000 ol Fixed expenses Total expected decrease in expenses Expected increase (decrease) in operating income Blu-ray Discs Total DVDs Sales revenue. $ 76000 418,000 $ 231,000 303,000 $ 155,000 115,000 76,000 Variable expenses 39000 Contribution margin 187,000 148,000 39,000 Fixed expenses: 76,000 Requirements Manufacturing Marketing and administrative 135,000 79,000 59,000 26,000 53,000 214,000 Total fixed expenses 129,000 85,000 $ (27,000) $ 19,000 $ (46,000) Operating income (loss) Print Done 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