PROBLEM 10-26B Dropping or Retaining a Product [LO2] CHECK FIGURE (1) Total avoidable cost: R257,900 Wendy Carlisle is the owner and managing director of Urban Outside Furniture, Ltd., a South African company that makes museum-quality reproductions of antique outdoor furniture. Ms. Carlisle 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 to be unprofitable. A condensed absorption costing income statement for the company and for the model C3 lawn chair for the quarter ended June 30 follows: Model C3 All Lawn Products Chair Sales ....... R2,980,000 R308,000 Cost of goods sold: Direct materials ...... 767,000 122,800 Direct labor .. 688,000 72,800 Fringe benefits (20% of direct labor) .. 137,600 14,560 Variable manufacturing overhead .. 28,800 4,400 Building rent and maintenance .... 30,800 4,800 Depreciation .................... 75,800 19,900 Total cost of goods Sold .......... 1,728,000 239,260 Gross margin .." 1,252,000 68,740 Selling and administrative expenses: Product managers' salaries .. 83,000 10,000 Sales commissions (5% of sales) ....... 149,000 15,400 Fringe benefits (15% of salaries and commissions) ... 34,800 3,810 Shipping ............ 128,000 14,130 General administrative expenses ................ 464,800 48,800 Total selling and administrative expenses .... 859,600 92,140 Net operating income (loss) .. R 392,400 R(23,400 ) The currency in South Africa is the rand, denoted here by R. The following additional data have been supplied by the company: a. Direct labor is a variable cost. b. All of the company's products are manufactured in the same facility and use the same equipment. Building rent and 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. Work in process and finished goods inventories are insignificant. f. Shipping costs are traced directly to products.g. General administrative expenses are allocated to products on the basis of sales. There would be no effect on the total general adminisb'ative 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? Explain. (Hint: Set this up as a break-even problem but include only the relevant costs.)