Electronic King sells Televisions, Stereo Equipment and Compact Discs (CDs) at a single store location in Barrie, Ontario. Although the company has been profitable over the years, management has seen a significant decline in CD sales and earnings. Much of the decline is attributable to the Internet and to companies such as Amazon.com that advertise discounted prices and delivery to the door shipping. Recent results are as follows: Sales Televisions $190,000 Stereo Equipment $230,000 CDs $70,000 Variable costs Fixed costs Total costs 114,000 28,000 142,000 161,000 37.500 198,500 56,000 22,500 78,500 Operating Income (loss) $48,000 - $31.500 $(8,500) Management is studying whether to drop CD sales because of the changing market and accompanying loss. If CDs are dropped the following changes are expected to occur: The space vacated by the CD department can be remodeled at a cost of $6,200 and will be devoted to a new line of high-end stereo equipment. Sales of stereo equipment is expected to increase by $60,000 with the introduction of a high-end brand of stereo and the overall stereo equipment contribution margin ratio will increase by 5%. Electronic King will increase advertising expenses by $12,500 to promote its new line of high-end stereo equipment. Electronic King can cut CD fixed costs by 40%. Remaining fixed costs will continue to be incurred. Sales of Televisions are expected to decline by 20% if the CD product line is dropped. a) Should Electronic king close its CD department? Show your calculations? b) Assume that Electronic King's CD inventory at the time of the closing decision amounted to $12,000. How would you treat this additional information in making the CD closeo-close decision