Q14E - Horngren'S Financial And Managerial Accounting

Question

Refer to Exercise E25-13. Assume that Video Avenue can avoid $39,000 of direct fixed costs by dropping the DVD product line. Prepare a differential analysis to show whether Video Avenue should stop selling DVDs.

Step-by-Step Solution

Answer

Yes, the company should drop the DVD product line

Step 1: Meaning of Product Line

In marketing terms, a product line refers to agroup of related products that are sold by the same company under an identical brand name.Companies sell various products and distinguish them from each other for profit maximization.

Step 2: Preparation of differential analysis

  

Particulars	After dropping DVD product line	Before dropping DVD product line	Difference
Net sales revenue	308,000	437,000	(129,000)
Less: Variable cost	(154,000)	(250,000)	(96,000)
Contribution margin	154,000	187,000	(33,000)
Less: Fixed cost
Manufacturing (132000-39000)	(93,000)	(132,000)	(39,000)
Selling and administrative	(65,000)	(65,000)	0
Total fixed cost	158,000	197,000	(39,000)
Operating income/(loss)	$(4,000)	$(10,000)	$6,000

 

The company should drop DVD Discs because it will reduce the operating loss by $6,000.