Calculate the effect on the overall companys net operating

Reference no: EM13572899

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. Ms. Douglas would like advice concerning the advisability of eliminating the model C3 lawnchair. These lawnchairs have been among the company's best-selling products, but they seem to be unprofitable.

A condensed absorption costing income statement for the company and for the model C3 lawnchair for the quarter ended June 30 follows:

	All Products		Model C3 Lawnchair
Sales	R	3,070,000	R	317,000

Cost of goods sold:
Direct materials		776,000		123,700
Direct labor		697,000		73,700
Fringe benefits (15% of direct labor)		104,550		11,055
Variable manufacturing overhead		29,700		5,300
Building rent and maintenance		31,700		5,700
Depreciation		76,700		20,800

Total cost of goods sold		1,715,650		240,255

Gross margin		1,354,350		76,745

Selling and administrative expenses:
Product managers' salaries		92,000		5,000
Sales commissions (10% of sales)		307,000		31,700
Fringe benefits (30% of salaries and commissions)		119,700		11,010
Shipping		137,000		30,335
General administrative expenses		465,700		47,700

Total selling and administrative expenses		1,121,400		125,745

Net operating income (loss)	R	232,950	R	(49,000)

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

The following additional data have been supplied by the company:

a.	Direct labor is a variable cost.
b.	All of the company's products are manufactured in the same facility and use the same equipment. Building rent and 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 lawnchair would have no effect on sales of other product lines.
e.	Work in process and finished goods inventories are insignificant.
f.	Shipping costs are traced directly to products.
g.	General administrative expenses are allocated to products on the basis of sales. There would be no effect on the total general administrative expenses if the model C3 lawnchair were dropped.
h.	If the model C3 lawnchair were dropped, the product manager would be laid off.

Required:
1a.	Calculate the effect on the overall company's net operating income if the Model C3 lawnchair is dropped? (Input the amount as a positive value.)

(Click to select)DecreaseIncrease in net operating income

1b.

Would you recommend that the model C3 lawnchair be dropped?

	No
	Yes

2.	What would sales of the model C3 lawnchair have to be, at minimum, in order to justify retaining the product?

Reference no: EM13572899

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