Q13E
Question
Top managers of Video Avenue 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:
VIDEO AVENUE
Income Statement
For the Year Ended December 31, 2018
Total Blu-ray Discs DVD Discs
Net Sales Revenue \(437,000 \)308,000 \(129,000
Variable Costs 250,000 154,000 96,000
Contribution Margin 187,000 154,000 33,000
Fixed Costs:
Manufacturing 132,000 76,000 56,000
Selling & Administrative 65,000 51,000 14,000
Total Fixed Expenses 197,000 127,000 70,000
Operating Income (Loss) \)(10,000) \(27,000 \)(37,000)
Total fixed costs will not change if the company stops selling DVDs.
Requirements
1. Prepare a differential analysis to show whether Video Avenue should drop the DVD product line.
2. Will dropping DVDs add $37,000 to operating income? Explain.
Step-by-Step Solution
VerifiedDropping the DVD product line will not add $37,000 to the operating income of the company.
Operating income refers to the revenue generation,less associated expenses from the core activities of a business concern. It mainly includes the sale and purchase of goods and services and related costs.
Particulars | Details | Blu-ray Discs ($) | Total ($) Blu-ray & DVD Disc | Differential amount ($) |
Net sales |
| 308,000 | 437,000 | (129,000) |
Less: Variable cost |
| (154,000) | (250,000) | (96,000) |
Contribution |
| 154,000 | 187,000 | (33,000) |
Less: Fixed cost |
|
|
|
|
Manufacturing | (76,000+56,000) | (132,000) | (132,000) | 0 |
Selling and administrative expense | (51,000+14,000) | (65,000) | (65,000) | 0 |
Total fixed cost |
| 197,000 | 197,000 |
|
Operating income/(loss) |
| (43,000) | (10,000) | (33,000) |
The product line of the DVD discs will not add $37,000 to the company’s operating income because the fixed cost associated with DVD discs will remain the same (i.e., $70,000), irrespective of the change in the product line.