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PROBLEM 7-7. Dropping a Product Line AVD Electronics, a consumer electron- ics retailer, has three product lines: audio, video, and communications (cell phones and pagers). Common costs are allocated based on relative sales. A product line in- come statement follows: AVD Electronics Income Statement for the Year Ended December 31, 2006 Communi- Audio Video cations Sales $1,025,000 $2,125,000 $2,120,000 Less cost of goods sold 563,750 1,168,750 1,908,000 Gross margin 461,250 956,250 212,000 Less other variable costs 50,000 65,000 21,000 Contribution margin 411,250 891,250 191,000 Less direct salaries 125,000 140,000 56,000 Less common fixed costs: Rent 11,669 24,194 24,137 Utilities 3,407 7,063 11,530 Depreciation 8,492 17,605 3,903 Other administrative costs 147,059 191,176 61,765 Net income $ 115,623 $ 511,212 $ 33,665 Total $5,270,000 3,640,500 1,629,500 136,000 1,493,500 321,000 60,000 22,000 30,000 400,000 $ 660,500 Since the profit for communication devices is relatively low, the company is consider- ing 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 communica- tions products. PROBLEM 7-7. Dropping a Product Line AVD Electronics, a consumer electron- ics retailer, has three product lines: audio, video, and communications (cell phones and pagers). Common costs are allocated based on relative sales. A product line in- come statement follows: AVD Electronics Income Statement for the Year Ended December 31, 2006 Communi- Audio Video cations Sales $1,025,000 $2,125,000 $2,120,000 Less cost of goods sold 563,750 1,168,750 1,908,000 Gross margin 461,250 956,250 212,000 Less other variable costs 50,000 65,000 21,000 Contribution margin 411,250 891,250 191,000 Less direct salaries 125,000 140,000 56,000 Less common fixed costs: Rent 11,669 24,194 24,137 Utilities 3,407 7,063 11,530 Depreciation 8,492 17,605 3,903 Other administrative costs 147,059 191,176 61,765 Net income $ 115,623 $ 511,212 $ 33,665 Total $5,270,000 3,640,500 1,629,500 136,000 1,493,500 321,000 60,000 22,000 30,000 400,000 $ 660,500 Since the profit for communication devices is relatively low, the company is consider- ing 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 communica- tions products