Top managers of California Video are alarmed by their operating losses. They are considering discontinuing 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 California Video should discontinue the DVD product line. Will discontinuing the DVDs add $ 24,000 to operating income? Explain.
2. Assume that California Video can avoid $ 29,000 of fixed expenses by discontinuing the DVD product line (these costs are direct fixed costs of the DVD product line). Prepare an incremental analysis to show whether California Video should stop selling DVDs.
3. Now, assume that all of the 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 companydo?

Transcribed Image Text:

California Video Product Line Contribution Margin Income Statement For the Year Ended December 31 5 Product lines Bu-ray Discs 306,0 153,000 DVDs Company Total 136,000 $ 442000 233,000 56,000 209000 es revenue 8 Less: Variable expenses 9 Contribution margin 10 Loss fibed expenses: 11Manufacturing 12 Marketing and administrative 13 Oper ating income (lass) 14 S 2,000 59.000 61,000 133,000 78,000