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Parino Company has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. Results of the fourth quarter are presented below:
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000
Revenue $ 24,000 $ 48,000 $ 30,000 $102,000
Variable departmental costs 15,000 22,000 23,000 60,000
Direct fixed costs 3,000 6,000 4,000 13,000
Allocated fixed costs 4,400 8,800 8,800 22,000
Net income (loss) $ 1,600 $11,200 $ (5,800) $ 7,000
Prepare an incremental analysis of the effect of dropping the Video product line. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Incremental revenue 42000 Incremental savings on variable costs -14000 Incremental savings on direct fixed costs -5000 Incremental decrease in profit to drop video line 9800

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Answer:

($3,000)

Explanation:

Preparation of the incremental analysis of the effect of dropping the Video product line.

Incremental analysis:

Incremental revenue($30,000)

Incremental savings on variable costs +23,000

Incremental savings on direct fixed costs +4000

The Incremental decrease in profit to drop the video line($3,000)

Incremental analyses tend to only show the differences that occured in revenues and costs. While the comparative income statements, tend to show the net amounts to be reported after the drop are not incremental analyses.

Therefore the incremental analysis of the effect of dropping the Video product line will be ($3,000)

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