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: Sales Cost of sales: Model C3 All Lawn Chair Products R2,200,000* R8,600,000 Direct materials Direct labour 880,000 2,236,000 528,000 1,978,000 Depreciation Fringe benefits (20% of direct labour) Variable manufacturing overhead Building rent and maintenance Total cost of sales Gross margin 105,600 395,600 26,400 86,000 28,600 86,000 140,800 215,000 1,709,400 4,996,600 490,600 3,603,400 Selling and administrative expenses: Product managers' salaries 72,600 215,000 Sales commissions (5% of sales) 110,000 430,000 Fringe benefits (20% of salaries and commissions) Shipping 36,520 129,000 29,000 344,000 352,000 1,376,000 600,120 2,494,000 General administrative expenses Total selling and administrative expenses Net operating income (loss) *The currency in South Africa is the rand, denoted here by R. R (109,520) R1,109,400 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.