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Question - Top Managers of Best Video 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:
Best Video Income Statement For the year ended December 31, 2016
Total
Blu-Ray Discs
DVD Discs
Sales Revenue
$432,000
$309,000
$123,000
Variable Costs
240,000
150,000
90,000
Contribution Margin
192,000
159,000
33,000
Fixed Costs:
Manufacturing
134,000
75,000
59,000
Selling and Administrative
69,000
52,000
17,000
Total Fixed Expenses
203,000
127,000
76,000
Operating Income (LOSS)
(11,000)
32,000
(43,000)
Total Fixed costs will not change if the company stops selling DVDs.
Required -
1) Prepare a differential analysis to show whether Best Video should drop the DVD product line.
2) Will dropping DVDs add $43,000 to operating income? Explain.
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