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: Hodel C3 All Lawn Chair Products Sales R2,oea,aoo* Rs,ooo,aoo Cost of sales: Direct materials 866,666 2,686,666 Direct labour 486,666 1,846,666 Fringe benefits (26% of direct labour) 96,666 353,666 Variable manufacturing overhead 24,666 86,666 Building rent and maintenance 26,666 86,666 Depreciation 123,666 266,666 Total cost of sales 1,554,666 4,648,666 Gross margin 446,666 3,352,666 Selling and administrative expenses: Product managers' salaries 66,666 266,666 Sales commissions (5% of sales) 166,666 466,666 Fringe benefits (26% of salaries and coIrIrIissions] 33,266 126,666 Shipping 2?,666 326,666 General administrative expenses 326,666 1,286,666 Total selling and administrative expenses 546,266 2,326,666 Net operating income (loss) R (199,293) R11332339'9 ' *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 nished 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 ifthe model C3 lawn chair were dropped. h. lfthe model C3 lawn chairwere dropped, the product manager would be laid off. Required: a-1. At current level of sales, compute the effect of net operating income ifthe Model C3 lawn chair is dropped. Required: a-1. At currerlt level of sales, compute the effect ofnet operating income ifthe Model C3 lawn chair is dropped. ZE 1-b. Would you recommend that the model C3 lawn chair be dropped? 0 Yes 0 No 1 What would sales of the model C3 lawn chair have to be, at minimum, in order tojustify retaining the product? {Hint Set this up as a breakeven 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.} E:l Troy Engines Ltd. manufactures a variety of engines for use in heavy equipment. The company has always produced all ofthe necessary parts for its engines, including all ofthe carburetors. An outside supplier has offered to produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $50 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally: . Direct materials cost $29 per unit. 'roy Engines pays its direct labour employees $20 per hour; each carburetor requires 30 minutes of labour time. ariable manufacturing overhead is allocated at 30% of direct labour cost. 'otal xed manufacturing cost amounts to $15 per unit, of which 60% is allocated common cost and the remaining 40% covers depreciation of special equipment and supervisory salaries. The special equipment has no resale value. Supervisory personnel will be transferred to a different department if the company decides to purchase the carburetor from the outside supplier. 5. Yearly production of this type of carburetor is 16,500 units. ewe; Required: 1-a. Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. Compute the total differential cost per unit for producing and buying the product. _::| 1-b. Should the outside supplier's offer be accepted? D Yes O No 2-a. Suppose that if the carburetors were purchased, Troy Engines Ltd. could use the freed capacity to launch a new product. The segment margin ofthe new product would be $150,000 per year. Compute the total differential cost for producing and buying the product. 2-b. Should Try Engines Ltd. accept the offer to buy the carburetors. for $50 per unit? D Yes O No