Question

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
Sales		R	500,000*		R	3,500,000
Cost of sales:
Direct materials			200,000			910,000
Direct labour			120,000			805,000
Fringe benefits (20% of direct labour)			24,000			161,000
Variable manufacturing overhead			6,000			35,000
Building rent and maintenance			6,500			35,000
Depreciation			32,000			87,500
Total cost of sales			388,500			2,033,500
Gross margin			111,500			1,466,500
Selling and administrative expenses:
Product managers’ salaries			16,500			87,500
Sales commissions (5% of sales)			25,000			175,000
Fringe benefits (20% of salaries and commissions)			8,300			52,500
Shipping			12,000			140,000
General administrative expenses			80,000			560,000
Total selling and administrative expenses			141,800			1,015,000
Net operating income (loss)		R	(30,300)		R	451,500

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

*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

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.)

Answer 1

Met operaning to come ut C3 lacon chair dropped Particulars Sales Amount 3000000 A cost of sales: Direct material Direce labour Fringe Benght (20% disced labour) variable manzacturing overhead Building Rent & maintainance Topse courtoo 710000 685000 132000 29ooo 1 87500 Total cost o saly B 11683 soo Goog margin. (2-B)-c Beso 1916 500 Selling And Administrative Expenses product Manager salary sales commegston (56g Salary) Fringe Benefit (20% g ealary & commissions Shipping 21000 150000 UV200 56oooo General odministrative Expenses Total selling & Administrative expenses-D 953200 363300 neet operating in come Note: ① 03 Lacon chair product manager is laid of means no salary was given to him. It is advisable to not drop the c3 talon chair because aroidable Revence exceeding aroidable expenses.

minimum Chair to sales Required Breal even to retain the Ca lalon Bosales = aroidable (specifce pored cons. pons beution marge 61800 30 20 GOO

Answer 2

racey 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
Sales		R	2,200,000	*		R	8,600,000
Cost of sales:
Direct materials			880,000				2,236,000
Direct labour			528,000				1,978,000
Fringe benefits (20% of direct labour)			105,600				395,600
Variable manufacturing overhead			26,400				86,000
Building rent and maintenance			28,600				86,000
Depreciation			140,800				215,000
Total cost of sales			1,709,400				4,996,600
Gross margin			490,600				3,603,400
Selling and administrative expenses:
Product managers’ salaries			72,600				215,000
Sales commissions (5% of sales)			110,000				430,000
Fringe benefits (20% of salaries and commissions)			36,520				129,000
Shipping			29,000				344,000
General administrative expenses			352,000				1,376,000
Total selling and administrative expenses			600,120				2,494,000
Net operating income (loss)		R	(109,520	)		R	1,109,400

*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 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.

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?
 

multiple choice

• 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.)