Concord Company sells electronics in Vancouver. Although the company has been very profitable over the years, management has been a significant decline in audio sales and earnings. Recent figures follow. (Monthly) Home Theatre Computer Audio $ $ $ Sales 200,000 240,000 80,000 Variable costs 120,000 168,000 64,000 Fixed costs 32,000 30,500 18,500 Total costs 152,000 198,500 82,500 Operating income (loss) 48,000 41,500 (2,500) Management is studying whether to drop Audio Department because of the changing market and accompanying loss. If the line is dropped, the following changes are expected to occur: 

1. Computer Department - The vacated space will be remodeled and will be devoted to an expanded line of Computer. Sales of computer are expected to increase by $65,000, and the Computer line’s overall gross margin will increase by 5% due to more discounts offered by suppliers for larger orders. Due to more computers will be displayed in the store, an increase of $1,200 electricity charges per month is expected. 

2. Audio Department – If this department is dropped, Conrad can only cut Audio’s fixed costs by $11,600. All staff in this line will be laid off. Conrad will lose its exclusive rights to sell 5 brand name audio product lines in Canada. 

3. Home Theatre Department - Customers who purchased Audio products often bought Home Theatre equipment. Sales of Home Theatre equipment are expected to fall by 10%. 

4. The firm will increase monthly advertising expenditures by $2,200 and $2,600 to promote the Computer and Home Theatre Department respectively. The change in use of the retail building will trigger an increase in monthly insurance premium by $150 for each of the Computer and Home Theatre department. 

REQUIRED: 

(a) Should Conrad close its Audio Department? Show computation in the following format to support your answer (use the same approach as you learned in class): Computer Home Theatre Audio 

(b) Discuss 3 qualitative factors that Conrad should consider before making a decision.