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 C3Lawn Chair All Products Sales R 1,800,000* R 7,400,000 Cost of sales: Direct materials 720,000 1,924,000 Direct labour 432,000 1,702,000 Fringe benefits (20% of direct labour) 86,400 340,400 Variable manufacturing overhead 21,600 74,000 Building rent and maintenance 23,400 74,000 Depreciation 115,200 185,000 Total cost of sales 1,398,600 4,299,400 Gross margin 401,400 3,100,600 Selling and administrative expenses: Product managers’ salaries 59,400 185,000 Sales commissions (5% of sales) 90,000 370,000 Fringe benefits (20% of salaries and commissions) 29,880 111,000 Shipping 25,000 296,000 General administrative expenses 288,000 1,184,000 Total selling and administrative expenses 492,280 2,146,000 Net operating income (loss) R (90,880) R 954,600 *The currency in South Africa is the rand, denoted here by R. The following additional data have been supplied by the company: a. Direct labour is a variable cost at Heritage Garden Furniture. b. All of the company’s products are manufactured in the same facility and use the same equipment. Building rent, 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. Inventories of work in process or finished goods are insignificant. f. Shipping costs are traced directly to products. g. General administrative expenses are allocated to products on the basis of sales dollars. 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: 1-a. At current level of sales, compute the effect of net operating income if the Model C3 lawn chair is dropped

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 C3Lawn Chair All Products Sales R 1,800,000* R 7,400,000 Cost of sales: Direct materials 720,000 1,924,000 Direct labour 432,000 1,702,000 Fringe benefits (20% of direct labour) 86,400 340,400 Variable manufacturing overhead 21,600 74,000 Building rent and maintenance 23,400 74,000 Depreciation 115,200 185,000 Total cost of sales 1,398,600 4,299,400 Gross margin 401,400 3,100,600 Selling and administrative expenses: Product managers’ salaries 59,400 185,000 Sales commissions (5% of sales) 90,000 370,000 Fringe benefits (20% of salaries and commissions) 29,880 111,000 Shipping 25,000 296,000 General administrative expenses 288,000 1,184,000 Total selling and administrative expenses 492,280 2,146,000 Net operating income (loss) R (90,880) R 954,600 *The currency in South Africa is the rand, denoted here by R. The following additional data have been supplied by the company: a. Direct labour is a variable cost at Heritage Garden Furniture. b. All of the company’s products are manufactured in the same facility and use the same equipment. Building rent, 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. Inventories of work in process or finished goods are insignificant. f. Shipping costs are traced directly to products. g. General administrative expenses are allocated to products on the basis of sales dollars. 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: 1-a. At current level of sales, compute the effect of net operating income if the Model C3 lawn chair is dropped

Principles of Cost Accounting

17th Edition

ISBN:9781305087408

Author:Edward J. Vanderbeck, Maria R. Mitchell

Publisher:Edward J. Vanderbeck, Maria R. Mitchell

Chapter10: Cost Analysis For Management Decision Making

Section: Chapter Questions

Problem 14P

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Question

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	All Products
Sales	R	1,800,000*	R	7,400,000

Cost of sales:
Direct materials		720,000		1,924,000
Direct labour		432,000		1,702,000
Fringe benefits (20% of direct labour)		86,400		340,400
Variable manufacturing overhead		21,600		74,000
Building rent and maintenance		23,400		74,000
Depreciation		115,200		185,000

Total cost of sales		1,398,600		4,299,400

Gross margin		401,400		3,100,600

Selling and administrative expenses:
Product managers’ salaries		59,400		185,000
Sales commissions (5% of sales)		90,000		370,000
Fringe benefits (20% of salaries and commissions)		29,880		111,000
Shipping		25,000		296,000
General administrative expenses		288,000		1,184,000

Total selling and administrative expenses		492,280		2,146,000

Net operating income (loss)	R	(90,880)	R	954,600

*The currency in South Africa is the rand, denoted here by R.

The following additional data have been supplied by the company:

a.	Direct labour is a variable cost at Heritage Garden Furniture.
b.	All of the company’s products are manufactured in the same facility and use the same equipment. Building rent, 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.	Inventories of work in process or finished goods are insignificant.
f.	Shipping costs are traced directly to products.
g.	General administrative expenses are allocated to products on the basis of sales dollars. 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:

1-a.	At current level of sales, compute the effect of net operating income if the Model C3 lawn chair is dropped

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