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?

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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?
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?
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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.

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