Top managers of Movie Street are alarmed by their operating losses. They are considering

QUESTION

E25-13 Top managers of Movie 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:
MOVIE STREET
Income
Statement
For
the Year Ended December 31, 2014

Total Blu-Ray Disc DVD Disc
Sales Revenue
$432,000
$305,000
$127,000
Variable Costs
246,000
150,000
96,000
Constribution Margin
186,000
155,000
31,000
Fixed Costs:

Manufacturing
128,000
71,000
57,000
Selling
and Administrative 67,000 52,000 15,000
Total Fixed Expenses 195,000 123,000 72.000
Operating Income (Loss) $(9,000) $32,000 $(41,000)

Total fixed costs will not change if the company
stops selling DVDs.

Requirements
1.Prepare
a differential analysis to show whether Movie Street should drop the DVD
product line.
2.Will
dropping DVDs add $41,000 to operating income? Explain.

ANSWER:

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