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

E25-13 Making dropping a product decisions

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.