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Firefox File Edit View History Bookmarks Tools window Help ®-o csur Portal . Home Peo pleSoft session expired TITANiumFall 2017 ACCT 2018-11 x/chap x ) U ezto. Wendy Carisle is the owner and managing director of Urban Outside Furniture, Ltd. , a South African company that makes museum-quality reproductions of antique outdoor furniture. Ms. Carlisie would like advice conceming the advisability of eliminating the model C3 lawn chair. These lawn chairs have been among the company's best-selling products, but they soom to be unprofitable A condensed absorption costing income statement for the follows t company and for the model C3 lawn chair for the quater endod June 30 Al Products R 3,204,000 Model C3 Lawn chair R 340,000 Sales Cost of goods sold Direct materials Direct labor Fnge benefits (20% of direct labor) Variable manufacturing overhead Building rent and maintenance Depreciation 27,000 101,760 848,000 88,800 169,600 17,760 44,800 14,000 46,800 14,400 91,800 29,500 Total cost of goods sold 2,128,000 266,220 Gross margin 076,000 73,780 Seling and administrative expenses Product managers' salaries Sales commissions (5% of sales) Fringe benefits (15% of salaries and commissions) Shipping General administrative expenses 99,000 13,200 160,200 17,000 4,530 144,000 30,130 480,800 64,800 38,880 Total selling and administrative exponses 922,880 129,660 Net operating income (loss) R 153,120 R (55,880 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 are manufactured in the same faclity and use the same depreciation are allocated to products using various b. All of the oompany's products equipment. Building rent and maintenance and bases. The equipment does not wear out through use, t

Explanation / Answer

1 Effect on operating income: Sales revenue lost 340000 Less:Total avoidable cost Direct materials 101760 Direct labor 88800 Fringe benefits 17760 Variable manufacturing overhead 14000 Product manager's salaries 13200 Sales commissions 17000 Fringe benefits 4530 Shipping 30130 287180 Decrease in overall net operating income 52820 1b. Model C3 chair should not be dropped since it results in decrease in net operating income 2 Break-even point in rand=Fixed cost/Contribution margin ratio Fixed cost: Product manager's salaries 13200 Fringe benefits (15% of salaries) 1980 15180 Contribution margin ratio=Contribution margin/sales Contribution margin =Sales-variable cost Variable cost=Total avoidable cost-Fixed cost=287180-15180=272000 Contribution margin =340000-272000=68000 Contribution margin ratio=68000/340000=0.2 Break-even point in rand=15180/0.2=75900

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