Question

E25-13 Making dropping a product decisions (506) Learning Objective 3
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			432000	309000	123000
Variable Costs			240000	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.
Requirements
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.

Answer 1

Differential Analysis
Particulars	Total	After Discontinue	Net Increase(Decrease)
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	134,000	-
Selling and Administrative	69,000	69,000	-
Total Fixed Expenses	203,000	203,000	-
Operating Income (Loss)	(11,000)	(44,000)	(33,000)

Dropping the DVD division would lead to further loss of 33,000

Therefore, should not be dropped

2. No, dropping DVDs only leads to more loss as the total fixed cost remains same irrespective of the selling of DVDs