Problem #2. Making dropping a product decisions_Movie Street

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.