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 $996,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following: Headphones Speakers Sales revenue $ 2,247,640 $ 2,141,940 Direct materials 730,000 930,000 Direct labor 492,000 252,000 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 $630,000. 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
| Headphones | Speakers | |
|---|---|---|
| Sales revenue | $ 2,247,640 | $ 2,141,940 |
| Direct materials | 730,000 | 930,000 |
| Direct labor | 492,000 | 252,000 |
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 $630,000. 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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