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:

1. Direct labour is a variable cost at Heritage Garden Furniture.
2. 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.
3. There is ample capacity to fill all orders.
4. Dropping the model C3 lawn chair would have no effect on sales of other product lines.
5. Inventories of work in process or finished goods are insignificant.
6. Shipping costs are traced directly to products.
7. 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.
8. If the model C3 lawn chair were dropped, the product manager would be laid off.

Required:

a-1. 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.)