ID ezto.mheducation com Solved: Accept or Reject a Special Order [ Assignment 5
ID: 2549882 • Letter: I
Question
ID ezto.mheducation com Solved: Accept or Reject a Special Order [ Assignment 5 Problem 9-2 Deciding Whether To Add Or Drop A P Problem 9-2 Deckding Whether To Add Or Drop A Problem 9-2 Deciding Whether to Add or Drop a Product (LO1 - CC3) Tracey Douglas is the owner and managing director of Heritage Garden Fumiture 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: Mcdel C3 Lawn Chair All Products Sales R1,300,000* R 5,900,000 Cost of sales: Direct materials Direct labour Fringe benefits (20% of direct labour) Variable manufacturing overhead Building rent and maintenance 520.000 312,000 62,400 15,600 16,900 83,200 1,534,000 1,357,000 271,400 59,000 59,000 47,500 1,010,100 Total cost of sales Gross margin Selling and administrative expenses: 3,427,900 900 2,472,100 Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping 42.900 65,000 21,580 20,000 208,000 147,500 295,000 88,500 236,000 944,000 General administrative expenses Total selling and administrative expenses Net operating income (loss) 357,480 1,711,000 R (67,580) R 761,100 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 cbsolete. 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.Explanation / Answer
Solution:-
Decrease in Net operating Income if Model C 3 is dropped
(b) Let sale be x
DM =520000/1300000= 40%
DL= 312000/1300000= 24%
x= 0.4x + 0.24x + 0.048x + 0.012x + 42900 + 0.05x + 8580 + 0.01x + 0.0154x
x-0.7754x = 51480
x = 51480/0.2246 = 229208
Sales 1300000 DM (520000) DL (312000) Fringe (62400) V O/H (15600) prod mngr salry (42900) sale comm (65000) fringe (21580) shipping (20000) Net operrng Income 240520