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: (Click the icon to view the analysis.) Assume that Video Avenue can avoid $39,000 of fixed costs by dropping the DVD product line (these costs are direct fixed costs of the DVD product line). Prepare a differential analysis to show whether Video Avenue should stop selling DVDs. (Enter decreases to revenues with a parentheses or minus sign.) Expected decrease in revenues Expected decrease in costs: Variable costs 96,000 Fixed costs Expected decrease in total costs Expected decrease in operating income

Answer 1

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Video Avenue
Differntial Anaylsis for dropping DVD Product Line
Expected Decrease in Revenues		129000
Expected Decrease in Costs:
Variable Costs	96000
Fixed Costs	37000
Expected Decrease in Total Costs:		133000
Expected Decrease in Operating Income		-4000

Since the losses will decrease by eliminating DVD division, it is advised to stop the production.