Problem 9-2 Deciding Whether to Add or Drop a Product (LO1 - CC3) 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 companys 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: Model C3 Lawn Chair All Products Sales R 1,400,000 * R 6,200,000 Cost of sales: Direct materials 560,000 1,612,000 Direct labour 336,000 1,426,000 Fringe benefits (20% of direct labour) 67,200 285,200 Variable manufacturing overhead 16,800 62,000 Building rent and maintenance 18,200 62,000 Depreciation 89,600 155,000 Total cost of sales 1,087,800 3,602,200 Gross margin 312,200 2,597,800 Selling and administrative expenses: Product managers salaries 46,200 155,000 Sales commissions (5% of sales) 70,000 310,000 Fringe benefits (20% of salaries and commissions) 23,240 93,000 Shipping 21,000 248,000 General administrative expenses 224,000 992,000 Total selling and administrative expenses 384,440 1,798,000 Net operating income (loss) R (72,240 ) R 799,800 *The currency in South Africa is the rand, denoted here by R. The following additional data have been supplied by the company: Direct labour is a variable cost at Heritage Garden Furniture. All of the companys 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. There is ample capacity to fill all orders. Dropping the model C3 lawn chair would have no effect on sales of other product lines. Inventories of work in process or finished goods are insignificant. Shipping costs are traced directly to products. 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. If the model C3 lawn chair were dropped, the product manager would be laid off. Required: a-1. At current level of sales, compute the effect of net operating income if the Model C3 lawn chair is dropped. 1-b. Would you recommend that the model C3 lawn chair be dropped? multiple choice Yes No 2. What would sales of the model C3 lawn chair have to be, at minimum, in order to justify retaining the product? (Hint: Set this up as a break-even problem, but include only the relevant costs from part (1).) (Round "Contribution margin ratio" to 2 decimal places and final answer to the nearest whole number.)