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. B (Click the icon to view the analysis.) Total fixed costs will not change if the company stops selling DVDs. 1 Requirements 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 $35,000 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 $84.000 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? X Analysis Total Blu-ray Discs 435,000 $ 305,000 $ 238,000 152,000 197,000 153,000 DVDs 130,000 86,000 44,000 Sales revenue Variable expenses. Contribution margin Fixed expenses: Manufacturing Marketing and administrative Total fixed expenses 125,000 91,000 68,000 56,000 57,000 35,000 216,000 124,000 92,000 (48,000) (19,000) $ 29,000 $ Operating income (loss)