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Category > Management Posted 17 Feb 2018 My Price 9.00

Tracey Douglas

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%u2019s 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 3,150,000 R 325,000
 
Cost of goods sold:        
Direct materials   784,000   124,500
Direct labor   705,000   74,500
Fringe benefits (15% of direct labor)   105,750   11,175
Variable manufacturing overhead   30,500   6,100
Building rent and maintenance   32,500   6,500
Depreciation   77,500   21,600
 
Total cost of goods sold   1,735,250   244,375
 
Gross margin   1,414,750   80,625
 
Selling and administrative expenses:        
Product managers' salaries   100,000   5,000
Sales commissions (10% of sales)   315,000   32,500
Fringe benefits (20% of salaries and commissions)   83,000   7,500
Shipping   145,000   37,225
General administrative expenses   466,500   46,900
 
Total selling and administrative expenses   1,109,500   129,125
 
Net operating income (loss) R 305,250 R (48,500)
 
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%u2019s 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. Omit the "R" sign in your response.)

 

(Click to select) Decrease Increase in net operating income R

 

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? (Omit the "R" sign in your response.)

 

Break-even point R

 

Answers

Maurice Tutor
(5)
Status NEW Posted 17 Feb 2018 07:02 PM My Price 9.00

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