Total Blu-ray Discs DVDs Sales revenue $ 417,000 $ 230,000 296,000 $ 154,000 121,000 76,000 Variable expenses Contribution margin 187,000 142,000 45,000 Fixed expenses: Manufacturing 116,000 71,000 57,000 45,000 36,000 Marketing and administrative 93,000 Total fixed expenses 209,000 128,000 81,000 $ (22,000) $ 14,000 $ (36,000) Operating income (loss) Requirement 1. Prepare an incremental analysis to show whether Movie Plus 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.) Movie Plus 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 Movie Plus drops the DVD in fixed expenses allocated to DVDs. product line, it vincur $ Requirement 2. Assume that Movie Plus can avoid $36,000 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 Movie Plus should stop selling DVDs. (Use parentheses or a minus sign to enter a decrease in operating income.) Movie Plus 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 $67,000 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 12%. What should the company do? Prepare an incremental analysis. (Use parentheses or a minus sign to enter a decrease in operating income.) Movie Plus 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: Movie Plus should consider This would let Movie Plus its operating income