Top managers of Sunset Video are alarmed by their operating losses. They are con
ID: 2577224 • Letter: T
Question
Top managers of Sunset 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: (Click the icon to view the analysis.) Total fixed costs will 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 profits with a parentheses or minus sign.) Expected decrease in revenues-Dropping DVDs Expected decrease in costs- Dropping DVDs iData Table in operating income Sunset Video Income Statement For the Year Ended December 31, 2018 Blu-ray Discs S 428,000$301,00D$ 127,000 DVD Total Discs Net Sales Revenue Variable Costs Contribution Margin Fixed Costs: 248,000 149,000 99,000 180,000 152,000 28,000 127,000 74,000 201,000 73,000 57,000 130,000 54,000 17,000 71,000 22,000 $(43,000) Manufacturing Selling and Administrative Total Fixed Expenses $ (21,000) S Operating Income (Loss) Print DoneExplanation / Answer
Sunset Video
Statement of Differential Analysis to show whether the company should drop the DVD product line:
Expected decrease in revenues – Dropping DVDs -$127,000
Expected decrease in costs – Dropping DVDs $99,000
Expected DECREASE in operating income -$28,000
The differential analysis shows that dropping of DVD product line would result in loss of the contribution margin of $28,000, which causes an overall decrease in operating income by $28,000.
The variable costing concept emphasizes that a product is profitable as long as it earns a contribution margin. The contribution margin absorbs the unavoidable or allocated fixed cost to reduce the fixed cost burden on the overall profits.
Hence, in the present situation dropping of DVD product line would result in contribution margin loss of $28,000, which absorbs the allocated fixed cost of $71,000 to the extent of $28,000 to result in an overall loss of $43,000.
If the DVD product line is dropped, the entire fixed cost burden of $71,000 would have to be borne by the Blue-ray discs thereby increasing the overall loss by $28,000.
Hence, the DVD product line should not be dropped.
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