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Item 1

Item 1 10 points

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 20 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $645,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following.

	Chairs			Desks
Sales revenue	$	1,046,500		$	1,950,000
Direct materials		585,000			810,000
Direct labor		130,000			300,000

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 $660,000. 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?

	Profit Margin
Chairs		%
Desks		%

Which of the two products should be dropped?

A.Chairs

B. Desk

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 $660,000. 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?

Estimated margin for desks - Year 2

%