Total

Blu$-$ray Discs

DVDs

Sales revenue. $..................$

$$411,000$

$$297,000$

$$114,000$

Variable expenses. $..............$

$228,000$

$156,000$

$72,000$

Contribution margin. $............$

$183,000$

$141,000$

$42,000$

Fixed expenses:

Manufacturing. $...........$

$118,000$

$69,000$

$49,000$

Marketing and administrative

$83,000$

$54,000$

$29,000$

Total fixed expenses. $......$

$201,000$

$123,000$

$78,000$

Operating income $($loss$)..........$

$$(18,000)$

$$18,000$

$$(36,000)$

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.

Total fixed costs will not change if the company stops selling DVDs$.$Requirement $1.$ Prepare an incremental analysis to show whether 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

Part $2$

Answer the following questions about the decision.

Should Movies and More drop the DVD product line?

Does dropping DVDs add to operating income?

If the DVD product line is dropped, how much of the fixed expenses allocated to DVD will Movies and More incur?

Part $3$

Requirement $2.$ Assume that can avoid of fixed expenses by dropping the DVD product line.$($These costs are direct fixed costs of the DVD product$$ line.$)$ Prepare an incremental analysis to show whether should stop selling DVDs$.($Use parentheses or a minus sign to enter a decrease in operating$$ 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

Part $4$

What decision should $$make$?$

A$.$

should $.$ The$$ product's incremental revenues its incremental costs.

B$.$

should $.$ The$$ product's incremental revenues its incremental costs.

C$.$

should $.$ The$$ product's incremental revenues its incremental costs.

D$.$

should $.$ The$$ product's incremental revenues its incremental costs.

Part $5$

Requirement $3.$Now$,$ assume that 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 $\%.$ 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 operati