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:
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
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.
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.