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 R1,900,000* All Products R 7,700,000 Sales Cost of sales: Direct materials Direct labour Fringe benefits (20% of direct labour) Variable manufacturing overhead Building rent and maintenance Depreciation 760,000 456,000 91,200 22,800 24,700 121,600 2,002,000 1,771,000 354,200 77,000 77,000 192,500 Total cost of sales 1,476,300 4,473,700 Gross margin 423,700 3,226,300 Selling and administrative expenses: Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping General administrative expenses 62,700 95,000 31,540 26,000 304,000 192,500 385,000 115,500 308,000 1,232,000 Total selling and administrative expenses 519,240 2,233,000 Net operating income (loss) R (95,540) R 993,300