Problem
#2. Making dropping a product decisions

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: 1.
$(31,000)

MOVIE STREET

Income Statement

For the Year Ended December 31, 2014

Total Blu-ray Discs DVD Discs

Sales
Revenue $432,000 $ 305,000 $ 127,000

Variables 246,000 150,000 96,000

Contribution
Margin 186,000 155,000 31,000

Fixed
Cost:

Manufacturing
128,000 71,000 57,000

Selling & Administrative
67,000 52,000 15,000

Total
Selling Expenses 195,000 123,000 72,000

Operating
Income (Loss) $(9000) $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.

Problem
#2. Making dropping a product decisions

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: 1.
$(31,000)

MOVIE STREET

Income Statement

For the Year Ended December 31, 2014

Total Blu-ray Discs DVD Discs

Sales
Revenue $432,000 $ 305,000 $ 127,000

Variables 246,000 150,000 96,000

Contribution
Margin 186,000 155,000 31,000

Fixed
Cost:

Manufacturing
128,000 71,000 57,000

Selling & Administrative
67,000 52,000 15,000

Total
Selling Expenses 195,000 123,000 72,000

Operating
Income (Loss) $(9000) $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.