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:

Model C3

Lawn ChairAll ProductsSalesR2,300,000*R8,900,000Cost of sales:Direct materials920,0002,314,000Direct labour552,0002,047,000Fringe benefits (20% of direct labour)110,400409,400Variable manufacturing overhead27,60089,000Building rent and maintenance29,90089,000Depreciation147,200222,500Total cost of sales1,787,1005,170,900Gross margin512,9003,729,100Selling and administrative expenses:Product managers' salaries75,900222,500Sales commissions (5% of sales)115,000445,000Fringe benefits (20% of salaries and commissions)38,180133,500Shipping30,000356,000General administrative expenses368,0001,424,000Total selling and administrative expenses627,0802,581,000Net operating income (loss)R(114,180)R1,148,100*The currency in South Africa is the rand, denoted here by R.

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-a.At current level of sales, compute the effect of net operating income if the Model C3 lawn chair is dropped