Top managers of City Video 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.

Requirements
1. Prepare an incremental analysis to show whether City Video should drop the DVD product line. Will dropping the DVDs add $36,000 to operating income? Explain.
2. Assume that City Video 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 City Video should stop selling DVDs.
3. Now, assume that all $68,000 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?

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Total Blu-ray Discs DVDs $428,000 $308,000 $120,000 88,000 32,000 Sales reveiue Variable expense Contribution margin Fixed expenses 238,000 150,000 190,000 133,00 Marketing and administrative Total fixed expens. 65,000 198,000 130 76,000 54,000 57,000 11,000 68,000