Wendy Carlisle is the owner and managing director of Urban Outside Furniture, Lt
ID: 2449483 • Letter: W
Question
Wendy Carlisle 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. Carlisle 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 to be unprofitable. A condensed absorption costing income statement for the company and for the model C3 lawn chair for the quarter ended June 30 follows:
All Products
Model C3 Lawn chair
Sales
R
2,980,000
R
308,000
Cost of goods sold:
Direct materials
767,000
122,800
Direct labor
688,000
72,800
Fringe benefits (20% of direct labor)
137,600
14,560
Variable manufacturing overhead
28,800
4,400
Building rent and maintenance
30,800
4,800
Depreciation
75,800
19,900
Total cost of goods sold
1,728,000
239,260
Gross margin
1,252,000
68,740
Selling and administrative expenses:
Product managers' salaries
83,000
10,000
Sales commissions (5% of sales)
149,000
15,400
Fringe benefits (15% of salaries and commissions)
34,800
3,810
Shipping
128,000
14,130
General administrative expenses
464,800
48,800
Total selling and administrative expenses
859,600
92,140
Net operating income (loss)
R
392,400
R
(23,400)
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.
b.
All of the company’s products are manufactured in the same facility and use the same equipment. Building rent and 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.
Work in process and finished goods inventories are insignificant.
f.
Shipping costs are traced directly to products.
g.
General administrative expenses are allocated to products on the basis of sales. 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:
1a.
Calculate the effect on the overall company's net operating income if the Model C3 lawn chair is dropped?
1b.
Would you recommend that the model C3 lawn chair be dropped?
Yes
No
2.
What would sales of the model C3 lawn chair have to be, at minimum, in order to justify retaining the product?
Wendy Carlisle 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. Carlisle 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 to be unprofitable. A condensed absorption costing income statement for the company and for the model C3 lawn chair for the quarter ended June 30 follows:
Explanation / Answer
Total Fixed cost associated with product model C3 lawn that will continue to be incurred even if product is dropped = Building maintenance + Depreciation + General administration expense
= 4800+19900+48800
= $ 73,500
1a) If model C3 lawn is dropped ,This cost will continue to be incurred and allocated to other products as these cost are not linked to products.
Net operating income at present = 392400-23400 = 369000
so net Operating Income if model C3 is dropped = 392400 - 73500 = $ 318900
1b)No, as net operating income of overall company will fall /decline if model C3 lawn is dropped.
3)Total sales = 308000 + 23400 = $331400
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