Tracey Douglas is the owner and managing director of Heritage Garden Furniture Ltd., a South African company that makes museum-quality reproductions of antique outdoor furniture. Tracey would like advice concerning the advisability of eliminating the model C3 lawn chair. These lawn chairs have been among the company?s best-selling products, but they seem unprofitable.

A condensed statement of operating income for the company and for the model C3 lawn chair for the quarter ended June 30 follows:

The following additional data have been supplied by the company:

a. Direct labour is a variable cost at Heritage Garden Furniture.

b. All of the company?s products are manufactured in the same facility and use the same equipment. Building rent, maintenance, and depreciation are allocated to products using various bases. The equipment does not wear out through use; it eventually becomes obsolete.

c. There is ample capacity to fill all orders.

d. Dropping the model C3 lawn chair would have no effect on sales of other product lines.

e. Inventories of work in process or finished goods are insignificant.

f. Shipping costs are traced directly to products.

g. General administrative expenses are allocated to products on the basis of sales dollars. There would be no effect on the total general administrative expenses if the model C3 lawn chair were dropped.

h. If the model C3 lawn chair were dropped, the product manager would be laid off.

Required:

1. Given the current level of sales, would you recommend that the model C3 lawn chair be dropped? Prepare appropriate computations to support your answer.

2. What would sales of the model C3 lawn chair have to be, at minimum, in order to justify retaining the product? Set this up as a break-even problem, but include only the relevant costs from part (1).

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All Products Model C3 Lawn Chair Sales R300,000* R2,900,000 Cost of sales: Direct materials 122,000 759,000 Direct labour 72,000 680,000 Fringe benefits (20% of direct labour) 14,400 136,000 Variable manufacturing overhead 3,600 28,000 Building rent and maintenance 4,000 30,000 Depreciation 19,100 75.000 Total cost of sales 235.100 1.708.000 Gross margin 64,900 1.192,000 Selling and administrative expenses: Product managers' salaries 10,000 75,000 Sales commissions (5% of sales) 15,000 145,000 Fringe benefits (20% of salaries and commissions) 5,000 44,000 Shipping 10,000 120,000 General administrative expenses 48.000 464,000 Total selling and administrative expenses 88.000 848,000 Net operating income (loss) R(23,100) R344,000