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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 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 companys 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

Sales

R

1,500,000*

R

6,500,000

Cost of sales:

Direct materials

600,000

1,690,000

Direct labour

360,000

1,495,000

Fringe benefits (20% of direct labour)

72,000

299,000

Variable manufacturing overhead

18,000

65,000

Building rent and maintenance

19,500

65,000

Depreciation

96,000

162,500

Total cost of sales

1,165,500

3,776,500

Gross margin

334,500

2,723,500

Selling and administrative expenses:

Product managers salaries

49,500

162,500

Sales commissions (5% of sales)

75,000

325,000

Fringe benefits (20% of salaries and commissions)

24,900

97,500

Shipping

22,000

260,000

General administrative expenses

240,000

1,040,000

Total selling and administrative expenses

411,400

1,885,000

Net operating income (loss)

R

(76,900)

R

838,500

*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 companys 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

1-b.

Would you recommend that the model C3 lawn chair be dropped?

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.)

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 companys 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

Sales

R

1,500,000*

R

6,500,000

Cost of sales:

Direct materials

600,000

1,690,000

Direct labour

360,000

1,495,000

Fringe benefits (20% of direct labour)

72,000

299,000

Variable manufacturing overhead

18,000

65,000

Building rent and maintenance

19,500

65,000

Depreciation

96,000

162,500

Total cost of sales

1,165,500

3,776,500

Gross margin

334,500

2,723,500

Selling and administrative expenses:

Product managers salaries

49,500

162,500

Sales commissions (5% of sales)

75,000

325,000

Fringe benefits (20% of salaries and commissions)

24,900

97,500

Shipping

22,000

260,000

General administrative expenses

240,000

1,040,000

Total selling and administrative expenses

411,400

1,885,000

Net operating income (loss)

R

(76,900)

R

838,500

*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 companys 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

1-b.

Would you recommend that the model C3 lawn chair be dropped?

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.)

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 companys 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

Sales

R

1,500,000*

R

6,500,000

Cost of sales:

Direct materials

600,000

1,690,000

Direct labour

360,000

1,495,000

Fringe benefits (20% of direct labour)

72,000

299,000

Variable manufacturing overhead

18,000

65,000

Building rent and maintenance

19,500

65,000

Depreciation

96,000

162,500

Total cost of sales

1,165,500

3,776,500

Gross margin

334,500

2,723,500

Selling and administrative expenses:

Product managers salaries

49,500

162,500

Sales commissions (5% of sales)

75,000

325,000

Fringe benefits (20% of salaries and commissions)

24,900

97,500

Shipping

22,000

260,000

General administrative expenses

240,000

1,040,000

Total selling and administrative expenses

411,400

1,885,000

Net operating income (loss)

R

(76,900)

R

838,500

*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 companys 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

1-b.

Would you recommend that the model C3 lawn chair be dropped?

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.)

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 companys 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

Sales

R

1,500,000*

R

6,500,000

Cost of sales:

Direct materials

600,000

1,690,000

Direct labour

360,000

1,495,000

Fringe benefits (20% of direct labour)

72,000

299,000

Variable manufacturing overhead

18,000

65,000

Building rent and maintenance

19,500

65,000

Depreciation

96,000

162,500

Total cost of sales

1,165,500

3,776,500

Gross margin

334,500

2,723,500

Selling and administrative expenses:

Product managers salaries

49,500

162,500

Sales commissions (5% of sales)

75,000

325,000

Fringe benefits (20% of salaries and commissions)

24,900

97,500

Shipping

22,000

260,000

General administrative expenses

240,000

1,040,000

Total selling and administrative expenses

411,400

1,885,000

Net operating income (loss)

R

(76,900)

R

838,500

*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 companys 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

1-b.

Would you recommend that the model C3 lawn chair be dropped?

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.)

Please show step by step detailed work. Thank you.

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