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. E (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.) $ 115,000 Movies and More Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: $ Variable expenses 76,000 0 Fixed expenses Total expected decrease in expenses 76,000 $ (39,000) Expected increase (decrease) in operating income It is incorrect to conclude that dropping DVDs would add to operating income. If the company drops the DVD product line, it will still incur $ 39000 in fixed expenses allocated Decision: Do not drop DVDs to DVDs Analysis Requirements Blu-ray Total Discs DVDs Sales revenue 418,000 $ 231,000 303,000 $ 155,000 115,000 76,000 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? Variable expenses 187,000 148,000 39,000 Contribution margin Fixed expenses: Manufacturing 135,000 76,000 53,000 59,000 26,000 Print Done Done Marketing and administrative 79,000 214,000 129,000 85,000 Total fixed expenses $ Operating income (loss)........... (27,000) $ 19,000 $ (46,000) Print Done 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. E (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.) $ 115,000 Movies and More Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: $ Variable expenses 76,000 0 Fixed expenses Total expected decrease in expenses 76,000 $ (39,000) Expected increase (decrease) in operating income It is incorrect to conclude that dropping DVDs would add to operating income. If the company drops the DVD product line, it will still incur $ 39000 in fixed expenses allocated Decision: Do not drop DVDs to DVDs Analysis Requirements Blu-ray Total Discs DVDs Sales revenue 418,000 $ 231,000 303,000 $ 155,000 115,000 76,000 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? Variable expenses 187,000 148,000 39,000 Contribution margin Fixed expenses: Manufacturing 135,000 76,000 53,000 59,000 26,000 Print Done Done Marketing and administrative 79,000 214,000 129,000 85,000 Total fixed expenses $ Operating income (loss)........... (27,000) $ 19,000 $ (46,000) Print Done