70f 10 (6 complete) HW Score: 46.76%, 468 of 10 pts E25-13 (similar to) Queslon
ID: 2584669 • Letter: 7
Question
70f 10 (6 complete) HW Score: 46.76%, 468 of 10 pts E25-13 (similar to) Queslon Help * Top managers of Sunset Video are alarmed by their operating losses. They are considering dropping the DVD product ine Company accountants have prepared the tolowing analysis to help make his decision (Click the icon to view the analysis.) Total fxed costs wil not change if the company stops selling DVDs Read the requirements Requirement 1. Prepare a differential analysis to show whether Sunset video should drop the DVD product line Begin by preparing a differential analysis to show whether Sunset Video should drop the DVDs product line. (Enter decreases to profts with Expected decrease in revenues -Dropping DVDs Expected decrease in costs-Dropping DVDs Expected parentheses or minus sign)Explanation / Answer
Answer
Blu-ray
DVD
Total
Net Sales
307000
121000
428000
Variable Costs
156000
94000
250000
Contribution Margin
151000
27000
178000
Fixed Cost
125000
69000
194000
Operating Income (loss)
26000
(42000)
(16000)
The total current Net operating Losses are $16000 when both the products are being sold.
Blu ray
Net Sales
307000
Variable Costs
156000
Contribution Margin
151000
Fixed Cost
125000
Fixed cost allocated to DVD product
69000
Net Operating Income (Loss)
(43000)
The total current Net operating Losses will be $43000 if DVD’s sale and production gets closed.
Bluray
Old amounts
Difference
Net Sales
307000
428000
121000
Variable Costs
156000
250000
94000
Contribution Margin
151000
178000
27000
Fixed Cost
125000
125000
0
Fixed cost allocated to DVD product
69000
69000
0
Net Operating Income (Loss)
-43000
-16000
27000
---Expected decrease in Revenue = $121000
---Expected decrease in costs = $94000
---Expected DECREASE in Operating Income = $27000
Dropping DVDs will not add or eliminate the $42000 operating loss. Rather, it will lead to a decrease of $27000 more in Net operating income. This is because, the fixed costs will continue to occur no matter what.
When DVDs are sold, its Contribution Margin covers some part of the fixed cost and leads to a loss of only $42000. But if there are no sale, there will be no contribution margin to cover fixed cost of $ 69000 and hence, burden of fixed cost will increase and will lead to decrease in operating income further by $27000 (as explained in Req 1)
Blu-ray
DVD
Total
Net Sales
307000
121000
428000
Variable Costs
156000
94000
250000
Contribution Margin
151000
27000
178000
Fixed Cost
125000
69000
194000
Operating Income (loss)
26000
(42000)
(16000)
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