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Prepare an incremental analysis to show whether Movie Street should drop the VCR-tape product...

Question:

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
Variable Expenses 246000 150000 96000
Contribution margin 186000 155000 31000
Field Expenses
Manufacturing 128000 71000 7000
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)
Sales Revenue $305,000 $305,000 0 ($127,000)
Variable expenses $150,000 $150,000 0 $96,000
Contribution Margin $155,000 $155,000 0 ($31,000)
Less: Fixed expenses
Manufacturing $128,000 $71,000 $57,000 $0
marketing $67,000 $52,000 $15,000 $0
Operating Income(Loss) (40,000) 32,000 (72,000) ($31,000)

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:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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