Question

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 25 percent. It will be dropped. The margin Is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $944,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following. Chairs Sales revenue $1,156,800 Direct 600,000 materials Direct labor 1 40,000 Desks $2,769,800 960,000 450,000 Required: a-1. Based on the CFO's new policy, calculate the profit margin for both chalrs 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 $810,000. 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? Complete this question by entering your answers in the tabs below. Reg A1 Reg A2 Red B Based on the CFO's new policy, calculate the profit margin for both chairs and desks. Profit Margin Chairs Desks Req A1 Req A2 >

Answer 1

a - 1		Profit Margin
	Chairs	20%
	Desks	30%
a - 2	Chairs
	As Chairs gives less profit margin
b.	Estimated margin for desks - Year 2	24.7%
	Workings:
a - 1		Chairs	Desks
(i)	Sales Revenue	$       11,56,800	$       27,69,000
	Direct material	$          6,00,000	$          9,60,000
	Direct labor	$          1,40,000	$          4,50,000
	Overhead	$          2,24,000	$          7,20,000
(ii)	Total cost	$          9,64,000	$       21,30,000
(iii) = (i) - (ii)	Gross Profit	$          1,92,800	$          6,39,000
(iii) / (ii)	Profit Margin	20%	30%
		Chairs	Desks	Total
(i)	Direct labor	$          1,40,000	$          4,50,000	$ 5,90,000
(ii) = (i) / $500000	Weight	24%	76%
(ii) X $800000	Overhead	$          2,24,000	$          7,20,000	$ 9,44,000
b.		Desks
(i)	Sales Revenue	$       27,69,000
	Direct material	$          9,60,000
	Direct labor	$          4,50,000
	Overhead	$          8,10,000
(ii)	Total cost	$       22,20,000
(iii) = (i) - (ii)	Gross Profit	$          5,49,000
(iii) / (ii)	Profit Margin	24.7%