Question

Top managers of Entertainment Plus 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. B)(Click the icon to view the analysis.) Total fixed costs will not change if the company stops selling DVDs. Requirements Requirement 1. Prepare an incremental analysis to show whether Entertainment Plus should drop the DVD product line. Will dropping the DVDs add $18,000 to operating income? Explain. (Enter a zero, "O", in an input box if there is no expected change in the expense. Use parentheses or a minus sign for an expected decrease in operating income.) Entertainment Plus Analysis of Dropping the DVD Product Line Expected decrease in revenues Expected decrease in expenses: Variable expenses Fixed expenses Total expected decrease in expenses Expected increase (decrease) in operating income Decision: It is V to conclude that dropping DVDs would add $18,000 to operating income. If the company drops the DVD product line, it incur $in fixed expenses allocated to DVDs. Fnter any number in the edit fields and then continue to the next question
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Answer 1

Case 1 :

Decision-making whether to drop the DVD Product line or to continue :

Particulars		Amount ($)
Incremental Sales revenue- A		126000
Incremental costs :
Variable Costs	-80000
Fixed Costs	0
Total Incremental Costs- B		-80000
Incremental Contribution		46000

Since fixed cost is sunk cost and it is unavoidable it is not considered for decision making (i.e. Incremental analysis.

There is an incremental contribution of $46000.

Decision: Don't drop the DVD Product line.

Case 2 :

Decision-making whether to drop the DVD Product line or to continue - when there are avoidable fixed costs of $18000

Particulars		Amount ($)
Incremental Sales revenue- A		126000
Incremental costs :
Variable Costs	-80000
Fixed Costs	-18000
Total Incremental Costs- B		-98000
Incremental Contribution		28000

Since even after considering the avoidable fixed cost of $18000 there is an incremental contribution of $28000.

Decision: Don't drop the DVD Product line.

Case 3 :

Decision-making whether to drop the DVD Product line or to continue - when there are avoidable fixed costs of $64000

and Blueray disc sales & production will reduce by 10%

1. Loss Due to DVD Product line if continued production :

Particulars		Amount ($)
Incremental Sales revenue- A		126000
Incremental costs :
Variable Costs	-80000
Fixed Costs	-64000
Total Incremental Costs- B		-64000
Incremental Contribution - 1		-18000

Blue ray Disc - Production & sales will effect by 10% due to DVD Product Line = 143000*10% = 14300

2. Loss if we decide to drop DVD Product line :

Savings from loss of contribution ( DVD) = 18000

Less: Loss of blue ray disc contribution = -14300

Incrememtal Gain/ (loss) = 18000-14300 = 3700

Decision : Drop DVD Product Line

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