Tracey Douglas is the owner and managing director of Heritage Garden Furniture L
ID: 2402594 • Letter: T
Question
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.
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:
Explanation / Answer
Computation of Total Avoidable cost :-
Direct Material
720000
Direct Labour
432000
Fringe Benefits
86400
Variable Mfr O/H
21600
Product Mgr Salary
59400
Sales Commission
90000
Fringe Benefit
29880
Shipping
25000
Total Avoidable cost
1464280
Effect on Profit :-
Sales
1800000
(-) Total Avoidable cost
1464280
Decrease Profit
335720
Decrease net operating income by R 335720
(1b) No, the model C3 lawn chair would not be dropped
(2) Minimum sale to retain C3:-
Fixed cost / Contribution Margin
Fixed cost = Total cost – Avoidable cost
= 1398600 + 492280 – 1464280 = 426600
Contribution margin = Contribution/Sales
Contribution = Sale – Avoidable cost
= 1800000 – 1464280 = 335720
335720/1800000 = 18.65 %
Minimum Sale = 426600 / 18.65 % = 2370000
Direct Material
720000
Direct Labour
432000
Fringe Benefits
86400
Variable Mfr O/H
21600
Product Mgr Salary
59400
Sales Commission
90000
Fringe Benefit
29880
Shipping
25000
Total Avoidable cost
1464280
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