Problem 9-2 Deciding Whether to Add or Drop a Product (LO1 - CC3) 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 R2,200,000* All Products R 8,600,000 Sales Cost of sales: Direct materials Direct labour Fringe benefits (20% of direct labour) Variable manufacturing overhead Building rent and maintenance Depreciation 880,000 528,000 105,600 26,400 28,600 140,800 2,236,000 1,978,000 395,600 86,000 86,000 215,000 Total cost of sales 1,709,400 4,996,600 Gross margin 490,600 3,603,400 Selling and administrative expenses: Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping General administrative expenses 72,600 110,000 36,520 29,000 352,000 215,000 430,000 129,000 344,000 1,376,000 Total selling and administrative expenses 600,120 2,494,000 Net operating income (loss) R (109,520) R1,109,400