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Movie Street

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Top managers of Movie Street are alarmed by their operating losses. They are considering
dropping the VCR-tape product line. Company accountants have prepared the
following analysis to help make this decision:

Assume that Movie Street can avoid 41,000 fixed
expenses by dropping the VCR-tape product line (these costs are direct fixed costs of
the VCR product line)

Total DVD  VCR
Sales revenue  432,000  305,000  127,000
Variable expenses  246,000  150,000  96,000
Contribution margin  186,000  155,000  31,000
Fixed expenses:
   Manufacturing  128,000  71,000  57,000
   Marketing and admin.  67,000  52,000  15,000
   Total fixed expenses  195,000  123,000  72,000
Operating income (loss)  (9,000)  32,000  (41,000)

Total fixed costs will not change if the company stops selling VCR tapes.

1. Prepare an incremental analysis to show whether Movie Street should stop selling
VCR tapes.

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