McNulty, Inc., produces desks and chairs. A new CFO has just been hired and anno
ID: 2568330 • Letter: M
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 45 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.
Manufacturing overhead for year 1 totaled $1,005,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:
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 $780,000. 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.)
Chairs Desks Sales revenue $ 1,710,800 $ 2,970,000 Direct materials 597,000 930,000 Direct labor 250,000 420,000Explanation / Answer
Answer to Part 1
Particulars
Chairs
Desks
Total
Sales revenue
1710800
2970000
4680800
Direct Materials
597000
930000
1527000
Direct Labour
250000
420000
670000
Overheads
375000
630000
1005000
Total Product Cost
1222000
1980000
3202000
Margin
488800
990000
1478800
Profit Margin as Percentage
40.00%
50.00%
46.18%
(488800/1222000)
(990000/1980000)
(1478800/4680800)
Answer to Part 2
Chairs has a Profit Margin of 40% and Desks has a Profit Margin 50% . Therefore, Chairs should be Dropped
Answer to Part 3
Particulars
Desks
Sales revenue
2970000
Direct Materials
930000
Direct Labour
420000
Overheads
780000
Total Product Cost
2130000
Margin
840000
Profit Margin as Percentage
39.44%
Answer to Part 1
Particulars
Chairs
Desks
Total
Sales revenue
1710800
2970000
4680800
Direct Materials
597000
930000
1527000
Direct Labour
250000
420000
670000
Overheads
375000
630000
1005000
Total Product Cost
1222000
1980000
3202000
Margin
488800
990000
1478800
Profit Margin as Percentage
40.00%
50.00%
46.18%
(488800/1222000)
(990000/1980000)
(1478800/4680800)