Top managers of Markus movies and games are alarmed by their operating losses. T
ID: 2394652 • Letter: T
Question
Top managers of Markus movies and games 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:
Movies and More
Income Statement
For the Year Ended December 31, 2016
Blu-ray
DVD
Total
Discs
Discs
Sales Revenue
$433,000
$306,000
$127,000
Variable Costs
251,000
153,000
98,000
Contribution Margin
182,000
153,000
29,000
Fixed Costs:
Manufacturing
132,000
79,000
53,000
Selling and Administrative
70,000
55,000
15,000
Total Fixed Expenses
202,000
134,000
68,000
Operating Income (Loss)
$(20,000)
$19,000
$(39,000)
Total fixed costs will not change if the company stops selling DVDs.
Requirements
1.
Prepare a differential analysis to show whether Movies and games Movies and More should drop the DVD product line.
2.
Will dropping DVDs add $39,000 to operating ?income? Explain.
Movies and More
Income Statement
For the Year Ended December 31, 2016
Blu-ray
DVD
Total
Discs
Discs
Sales Revenue
$433,000
$306,000
$127,000
Variable Costs
251,000
153,000
98,000
Contribution Margin
182,000
153,000
29,000
Fixed Costs:
Manufacturing
132,000
79,000
53,000
Selling and Administrative
70,000
55,000
15,000
Total Fixed Expenses
202,000
134,000
68,000
Operating Income (Loss)
$(20,000)
$19,000
$(39,000)
Explanation / Answer
Part-1
Differential analysis to show whether DVD product line should be dropped or not-
Sales Revenue- Nil
Less Varable Costs- Nil
Contribution Margin- Nil
Less- Fixed Costs- $68,000
Profit/(Loss)- ($68.000)
Sales Revenue- $127,000
Less- Variable Costs- $98,000
Contribution Margin- $29,000
Less Fixed Costs- $68,000
Profit/(Loss)- ($39,000)
The analysis shows that even if we drop the DVD product line, fixed costs will continue to occur. This will result in increase in loss from $39,000 to $68,000. Hence, dropping DVD line would not be beneficial for the company.
Instead of dropping the line, company should spend on advertising and marketing expenses to increase the sales revenue of the product.
Part-2
Dropping the DVD line will not add $39,000 to operating income because the contribution of $29,000 will be lost and the fixed cost of $68,000 will continue to occur. Therefore, it will result in loss of $68,000
Drop the DVD product line Continue DVD product lineSales Revenue- Nil
Less Varable Costs- Nil
Contribution Margin- Nil
Less- Fixed Costs- $68,000
Profit/(Loss)- ($68.000)
Sales Revenue- $127,000
Less- Variable Costs- $98,000
Contribution Margin- $29,000
Less Fixed Costs- $68,000
Profit/(Loss)- ($39,000)
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