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. Total fixed costs will not change if the company stops selling DVDs.

Requirements
1. Prepare an incremental analysis to show whether Video Avenue should drop the DVD product line. Will dropping DVDs add $30,000 to operating income? Explain.
2. Assume that Video Avenue can avoid $30,000 of fixed expenses by dropping the DVD product line (these costs are direct fixed costs of the DVD product line). Prepare an incremental analysis to show whether Video Avenue should stop selling DVDs.
3. Now, assume that all $70,000 of fixed costs assigned to DVDs are direct fixed costs and can be avoided if the company stops selling DVDs. However, marketing has concluded that Blu-ray disc sales would be adversely affected by discontinuing the DVD line (retailers want to buy both from the same supplier). Blu-ray disc production and sales would decline 10%. What should the company do?

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Total Blu-ray Discs DVDs Sales revenue. $420,000 $300,000 $120,000 Variable expenses Contribution margin Fixed expenses 230,000 150,000 80,000 40,000 ,000 150,000 Manufacturing Marketing and administrative. Total fixed expenses 70,000 55,000 125,000 (5,000) 25,000 $(30,000) 125,000 70,000 195,000 55,000 15,000 70,000 Operating income (loss)