McNulty, Inc., produces desks and chairs. A new CFO has just been hired and announces a new policy that if a product cannot earn a margin of at least 15 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $880,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following. Chairs Desks Sales revenue $ 1,001,000 $ 2,469,600 Direct materials 598,000 940,000 Direct labor 120,000 430,000 Required: a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks. a-2. Which of the two products should be dropped? b. Regardless of your answer in requirement (a), the CFO decides at the beginning of year 2 to drop the chair product. The company cost analyst estimates that overhead without the chair line will be $790,000. The revenue and costs for desks are expected to be the same as last year. What is the estimated margin for desks in year 2?
Exercise 9-31 (Algo) Reported Costs and Decisions (LO 9-1)
McNulty, Inc., produces desks and chairs. A new CFO has just been hired and announces a new policy that if a product cannot earn a margin of at least 15 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.
Manufacturing
| Chairs | Desks | |||||
| Sales revenue | $ | 1,001,000 | $ | 2,469,600 | ||
| Direct materials | 598,000 | 940,000 | ||||
| Direct labor | 120,000 | 430,000 | ||||
Required:
a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks.
a-2. Which of the two products should be dropped?
b. Regardless of your answer in requirement (a), the CFO decides at the beginning of year 2 to drop the chair product. The company cost analyst estimates that overhead without the chair line will be $790,000. The revenue and costs for desks are expected to be the same as last year. What is the estimated margin for desks in year 2?
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