Problem 10-26A Dropping or Retaining a Product [LO2]

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 companys 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 3,080,000 R 318,000

Cost of goods sold:

Direct materials 777,000 123,800

Direct labor 698,000 73,800

Fringe benefits (20% of direct labor) 139,600 14,760

Variable manufacturing overhead 29,800 5,400

Building rent and maintenance 31,800 5,800

Depreciation 76,800 20,900

Total cost of goods sold 1,753,000 244,460

Gross margin 1,327,000 73,540

Selling and administrative expenses:

Product managers' salaries 93,000 6,000

Sales commissions (5% of sales) 154,000 15,900

Fringe benefits (25% of salaries and commissions) 61,750 5,475

Shipping 138,000 32,665

General administrative expenses 465,800 47,600

Total selling and administrative expenses 912,550 107,640

Net operating income (loss) R 414,450 R (34,100)

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