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. (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.) Movies and More 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: allocated to DVDs. DVDs. It is to conclude that dropping DVDs would add to operating income. If Movies and More drops the DVD product line, it incur $in fixed expenses Requirement 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. (Use parentheses or a minus sign to enter a decrease in operating income.) Movies and More 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 $76,000 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 12%. What should the company do? Requirement 3. Now, assume that $76,000 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 12%. What should the company do? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Movies and More 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: Movies and More should consider This would let Movies and More its operating income. Sales revenue Variable expenses Contribution margin Fixed expenses: Manufacturing Marketing and administrative Blu-ray Total Discs DVDs 421,000 $ 307,000 $ 114,000 235,000 157,000 78,000 186,000 150,000 36,000 130,000 68,000 62,000 84,000 58,000 26,000 Total fixed expenses 214,000 126,000 88,000 $ (28,000) $ 24,000 $ (52,000) Operating income (loss)