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	300,000*		R	2,900,000
Cost of sales:
Direct materials			122,000			759,000
Direct labour			72,000			680,000
Fringe benefits (20% of direct labour)			14,400			136,000
Variable manufacturing overhead			3,600			28,000
Building rent and maintenance			4,000			30,000
Depreciation			19,100			75,000
Total cost of sales			235,100			1,708,000
Gross margin			64,900			1,192,000
Selling and administrative expenses:
Product managers’ salaries			10,000			75,000
Sales commissions (5% of sales)			15,000			145,000
Fringe benefits (20% of salaries and commissions)			5,000			44,000
Shipping			10,000			120,000
General administrative expenses			48,000			464,000
Total selling and administrative expenses			88,000			848,000
Net operating income (loss)		R	(23,100)		R	344,000

*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.