McNulty, Inc., produces desks and chairs. A new CFO has just been hired and anno

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 15 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $880,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following: Chairs Desks Sales revenue Direc: materials Direct labor $1,001,000 $2,469,600 598,000 120,000 940,000 430,000 Required: a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks. 91% 161% Chairs Desks a-2. Which of the two products should be dropped? O Chairs Desks 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 $790,000. 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 (Do not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal place.) desks

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Chairs Desks Total Sales Revenue    1,001,000.00    2,469,600.00    3,470,600.00 Porduct Costs :   Direct Materials        598,000.00        940,000.00    1,538,000.00 Direct Labour        120,000.00        430,000.00        550,000.00 Overhead Chairs = 120,000*880,000/550,000 Desks = 430,000*880,000/550,000        192,000.00        688,000.00        880,000.00 Total product cost        910,000.00    2,058,000.00    2,968,000.00 Gross Margin          91,000.00        411,600.00        502,600.00 Gross Margin in %= Gross Margin/Product cost 10.00% 20.00% a-2) Chairs should be dropped as gross margin is less than 15% b) Sales Revenue    2,469,600.00 Porduct Costs :   Direct Materials        940,000.00 Direct Labour        430,000.00 Overhead        790,000.00 Total product cost    2,160,000.00 Gross Margin        309,600.00 Gross Margin in %= Gross Margin/Product cost 14.33%

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