PROBLEM 7-7. Dropping a Product Line AVD Electronics, a consumer electronics retailer, has three product lines: audio, video, and communications (cell phones and pagers). Common costs are allocated based on relative sales. A product line income statement follows:

AVD Electronics Income Statement for the Year Ended I>ecember 31, 2006 Communi-
Audio Video cations Total Sales $1,025,000 $2,125,000 $2,120,000 $5,270,000 Less cost of goods sold 563,750 1,168,750 1,908,000 3,640,500 Gross margin 461,250 956,250 212,000 1,629,500 Less other variable costs 50,000 65,000 21,000 136,000 Contribution margin 411,250 891,250 191,000 1,493,500 Less direct salaries 125,000 140,000 56,000 321,000 Less common fixed costs:
Rent 11,669 24,194 24,137 60,000 Utilities 3,407 7,063 11,530 22,000 Depreciation 8,492 17,605 3,903 30,000 Other administrative costs 147,059 191,176 61,765 400,000 Net income $ 115,623 $ 511,212 $ 33,665 $ 660,500 Since the profit for communication devices is relatively low, the company is considering dropping this product line.
Required

a. Determine the impact on profit of dropping communications products.

b. Discuss the potential qualitative effects of discontinuing the sale of communications products.