Top managers of Video Street 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 X Requirements - X Analysis pro 1. Prepare an incremental analysis to show whether Video Street should drop the DVD product line. Will dropping DVDs add to operating income? Explain. Total Blu-ray Discs DVDs 2. Assume that Video Street can avoid $29,000 of fixed expenses by dropping the DVD product line. (These costs are direct fixed costs of the DVD product line.) Sales revenue. . . .. $ 416,000 $ 296,000 $ 120,000 Prepare an incremental analysis to show whether Video Street should stop selling 234,000 DVDS Variable expenses . . 158,000 76,000 3. Now, assume that $83,000 of fixed costs assigned to DVDs are direct fixed costs Contribution margin .. 182,000 138,000 44,000 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 Fixed expenses: the DVD line. (Retailers want to buy both from the same supplier.) Blu-ray disc Manufacturing 128,000 69,000 59,000 production and sales would decline 6%. What should the company do? Marketing and administrative 86,000 57,000 29,000 Total fixed expenses 214,000 126,000 88,000 $ (32,000) $ 12,000 $ (44,000) Operating income (loss) . . . . . . . .. . g in pro Print Done a d Print DoneRequirement 1. Prepare an incremental analysis to show whether Video Street 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 Street 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: DVDs. It is to conclude that dropping DVDs would add to operating income. If Video Street drops the DVD product line, it incur $ in fixed expenses allocated to DVDs.Requirement 2. Assume that Video Street can avoid $29,000 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 Street should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Video Street 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 $83,000 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? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Video Street 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: Video Street should consider This would let Video Street its operating income