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 Chair All Products R2,200,000* R 8,600,000 Sales Cost of sales: Direct materials Direct labour Fringe benefits (20% of direct labour) Variable manufacturing overhead Building rent and maintenance Depreciation 880,000 528,000 105.600 26,400 28,600 140,800 2,236,000 1,978,000 395.600 86,000 86.000 215,000 Total cost of sales 1,709,400 4,996,600 3,603,400 Gross margin 490,600 Selling and administrative expenses: Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping General administrative expenses 72,600 110,000 36,520 29,000 352,000 215,000 430.000 129,000 344,000 1,376,000 Total selling and administrative expenses 600.120 2,494,000 Net operating income (loss) R (109,520) R1,109,400 *The currency in South Africa is the rand, denoted here by R. The following additional data have been supplied by the company: a. Direct 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 in net operating income by R . 1-b. Would you recommend that the model C3 lawn chair be dropped? O 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.) Sales volume
