Regular Company produces audio equipment, specifically headphones and speakers. A new CEO has just been hired and announces a new policy that if a product cannot earn a markup of at least 25 percent, it will be dropped. The markup is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $1,032,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following: Sales revenue Direct materials Direct labor Headphones $ 2,339,200 760,000 504,000 Speakers $ 2,226,600 960,000 264,000 Required: a-1. Calculate the markup for both headphones and speakers. a-2. Based on the CFO's new policy, 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 speakers from the product line. The company cost analyst estimates that overhead without the speaker line will be $660,000. The revenue and costs for headphones are expected to be the same as last year. What is the estimated markup for headphones in year 2?
Regular Company produces audio equipment, specifically headphones and speakers. A new CEO has just been hired and announces a new policy that if a product cannot earn a markup of at least 25 percent, it will be dropped. The markup is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $1,032,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following: Sales revenue Direct materials Direct labor Headphones $ 2,339,200 760,000 504,000 Speakers $ 2,226,600 960,000 264,000 Required: a-1. Calculate the markup for both headphones and speakers. a-2. Based on the CFO's new policy, 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 speakers from the product line. The company cost analyst estimates that overhead without the speaker line will be $660,000. The revenue and costs for headphones are expected to be the same as last year. What is the estimated markup for headphones in year 2?
Chapter9: Responsibility Accounting And Decentralization
Section: Chapter Questions
Problem 8EA: Using the information in the previous exercises about Marleys Manufacturing, determine the operating...
Related questions
Question

Transcribed Image Text:Regular Company produces audio equipment, specifically headphones and speakers. A new CEO has just been hired and announces
a new policy that if a product cannot earn a markup of at least 25 percent, it will be dropped. The markup is computed as product
gross profit divided by reported product cost.
Manufacturing overhead for year 1 totaled $1,032,000. Overhead is allocated to products based on direct materials cost. Data for year
1 show the following:
Sales revenue
Direct materials
Direct labor
Headphones
$ 2,339,200
760,000
504,000
Speakers
$ 2,226,600
960,000
264,000
Required:
a-1. Calculate the markup for both headphones and speakers.
a-2. Based on the CFO's new policy, 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 speakers from the product
line. The company cost analyst estimates that overhead without the speaker line will be $660,000. The revenue and costs for
headphones are expected to be the same as last year. What is the estimated markup for headphones in year 2?
Expert Solution

Step 1
Continue or drop is the decision making technique which is used by the management and cost accountants to decide if the production of a particular product should be continued or dropped.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College

Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning

Principles of Cost Accounting
Accounting
ISBN:
9781305087408
Author:
Edward J. Vanderbeck, Maria R. Mitchell
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College

Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning

Principles of Cost Accounting
Accounting
ISBN:
9781305087408
Author:
Edward J. Vanderbeck, Maria R. Mitchell
Publisher:
Cengage Learning