What would sales of the model c3 lawn chair have to be

Question

Wendy Carlisle is the owner and managing director of Urban Outside Furniture, Ltd., a South African company that makes museum-quality reproductions of antique outdoor furniture. Ms. Carlisle 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 to be unprofitable. A condensed absorption costing income statement for the company and for the model C3 lawn chair for the quarter ended June 30 follows:

 

	All Products		Model C3 Lawn chair
Sales	R	2,980,000	R	308,000
Cost of goods sold:
Direct materials		767,000		122,800
Direct labor		688,000		72,800
Fringe benefits (20% of direct labor)		137,600		14,560
Variable manufacturing overhead		28,800		4,400
Building rent and maintenance		30,800		4,800
Depreciation		75,800		19,900
Total cost of goods sold		1,728,000		239,260
Gross margin		1,252,000		68,740
Selling and administrative expenses:
Product managers' salaries		83,000		10,000
Sales commissions (5% of sales)		149,000		15,400
Fringe benefits (15% of salaries and commissions)		34,800		3,810
Shipping		128,000		14,130
General administrative expenses		464,800		48,800
Total selling and administrative expenses		859,600		92,140
Net operating income (loss)	R	392,400	R	(23,400)

 

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 lawn chair 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 lawn chair were dropped.
h.	If the model C3 lawn chair 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 lawn chair is dropped? (Input the amount as a positive value.)

 

 

in net operating income

R

 

1b.	Would you recommend that the model C3 lawn chair be dropped?
	No Yes

 

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