Prepare an incremental analysis to show whether Movie Street should drop the VCR-tape product line.
|MOVIE STREET Income Statement From the Year Ended December 31, 2012|
|Total||DVD Discs||VCR Tapes|
|Sales Revenue, $||432000||305000||127000|
|Marketing and administrative||67000||2000||15000|
|Total field expenses||195000||123000||72000|
|Operating income (loss)||9000||32000||41000|
Will dropping VCR tapes add $41,000 to operating income? Explain.
Shut Down Vs Continue
While deciding for whether to shut down or continue product line, only relevant costs should be taken into consideration.Variable costs are relevant as they are affected by shut down. Whereas fixed costs are constant and hence irrelevant for the decision making.
Answer and Explanation:
|Total||DVD Discs||VCR tapes||Incremental Income (Loss)|
|Less: Fixed expenses|
No, dropping the VCR line will not increase income by $41,000 .This is because of fixed costs.
Fixed costs are constant they will occur even if the line is closed down.So, When the VCR line is closed down it will lose 31,000 of contribution margin hence increasing the total loss from $9,000 to (9000+31000) $40,000.
fixed manufacturing and marketing cost will continue to occur.
Learn more about this topic:
from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12