Top managers of Video Avenue 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. * Analysis - Requirements Requirement 1. Prepare an incremental analysis to show whether Video Avenue s income.) es or a minus sign to enter a de Video Avenue Analysis of Dropping the DVD Product Line Expected decrease in revenues Sales revenue Variable expenses Expected decrease in expenses: Contribution margin Total Blu-ray Discs DVDs $ 444,000 $ 237,000 309,000 $ 155,000 135,000 82,000 207,000 154,000 53,000 Variable expenses Fixed expenses: Fixed expenses Total expected decrease in expenses Manufacturing 139,000 78,000 61,000 Marketing and administrative 91,000 56,000 35,000 Expected increase (decrease) in operating income Total fixed expenses Operating income (loss) 230,000 134,000 96,000 $ (23,000) $ 20,000 $ (43,000) Decision: . It is to conclude that dropping DVDs wo expenses allocated to DVDs. incremental analysis to show whe Requirement 2. Assume that Video Avenue can avoid $35,000 of fixed expenses b should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease Video Avenue Analysis of Dropping the DVD Product Line Print Done Requirement 1. Prepare an incremental analysis to show whether Video Avenue 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.) Video Avenue 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 to conclude that dropping DVDs would add to operating income. If the company drops the DVD product line, it Decision: It is Requirem should sto Drop DVDs Do not drop DVDs deo Avenue incur $ in fixed expenses allocated to DVDs. venue 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 Video Avenue theses or a minus sign to enter a decrease in operating income.) Requirement 2. Assume that Video Avenue 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 Video Avenue should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Video Avenue 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 all $96,000 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? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Requirement 3. Now, assume that all $96,000 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? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Video Avenue Analysis of Dropping the DVD Product Line Expected decrease 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: Video Avenue should consider This would let Video Avenue its operating income