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 R2,300,000 R 8,900,000 All Products Sales Cost of sales: Direct materials Direct labour Fringe benefits (20% of direct labour) Variable manufacturing overhead Building rent and maintenance Depreciation 920,000 552,000 110,400 27,600 29,900 147,200 2,314,000 2,047,000 409,400 89,000 89,000 222,500 1,787,100 Total cost of sales 5,170,900 Gross margin 512.900 3,729,100 Selling and administrative expenses: Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping General administrative expenses 222,500 445,000 133,500 356,000 1,424,000 75,900 115,000 38,180 30,000 368,000 Total selling and administrative expenses 627,080 2,581,000 R (114,180) R 1,148,100 Net operating income (loss) *The currency in South Africa is the rand, denoted here by R.

Answer 1

ANSWER

If Model C3 lawn Chair is dropped:
Total Contribution generated by C3 lawn chair
Sales	2,300,000
Less:Cost of Sales
Direct materials	920,000
Direct labour	552,000
Fringe benefits	110,400
Variable manufacturing Overhead	27,600
Less: Selling and Administrative Expenses
Production manager Salaries	75,900
Sales commission	115,000
Fringe benefits	38,180
Shipping	30,000
Contribution margin	430,920
1 a) Decrease in Net Operating Income by R430,920
1 b) If Model C3 lawn Chair is dropped then net operating Income would decrease by R430,920. Therefore the product should not be dropped.
2
Contribution Margin ratio    = 430,920/2,300,000	= 0.19
Total fixed Costs attributable to Model C3 lawn chair (29,900+147,200+368,000) =				545,100
Required Sales = Fixed Cost / Contribution margin ratio		=2,868,947

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