1. 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. Ms. Douglas would like advice concerning the advisability of eliminating the model C3 lawnchair. These lawnchairs have been among the companys best-selling products, but they seem to be unprofitable.

A condensed absorption costing income statement for the company and for the model C3 lawnchair for the quarter ended June 30 follows:

	All Products	Model C3 Lawnchair
Sales	R2,900,000	R300,000
Variable expenses	1,708,000	235,100
Gross margin	1,192,000	64,900
Depreciation	120,000	10,000
Product managers salaries	119,000	15,000
Building rent & maintenance	145,000	15,000
General administrative expenses	464,000	48,000
Total fixed expenses	848,000	88,000
Net operating income (loss)	R 344,000	R (23,100)

The currency in South Africa is the rand, denoted here by R.

The following additional data have been supplied by the company:

a. All of the companys products are manufactured in the same facility and use the same equipment. Building rent and maintenance and depreciation would not be avoided if the model C3 lawnchair were dropped.

b. There is ample capacity to fill all orders.

c. Dropping the model C3 lawnchair would have no effect on sales of other product lines.

d. General administrative expenses are allocated to products on the basis of sales. The general administrative expenses related to the model C3 lawnchair would be saved if it were dropped.

h. If the model C3 lawnchair were dropped, the product manager would be laid off.

Given the current level of sales, would you recommend that the model C3 lawnchair be dropped? Prepare appropriate computations to support your answer. (3pts)