McNulty, Inc., produces desks and chairs. A new CFO has just been hired and anno
ID: 2597690 • 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 30 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.
Manufacturing overhead for year 1 totaled $799,000. 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 $680,000. 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 $ 1,240,000 $ 2,286,900 Direct materials 587,000 830,000 Direct labor 150,000 320,000Explanation / Answer
Chairs
Desks
Sales
1,240,000
2,286,900
Direct Material
(587,000)
(830,000)
Direct Labor
(150,000)
(320,000)
Manufacturing Overhead
(255,000)
(150,000/470,000)*$799,000
(544,000)
(320,000/470,000)*$799,000
Total cost
(992,000)
(1,694,000)
Gross profit
248,000
592,900
Profit Margin
= (Profit/Total cost) * 100
Chairs = (248,000/992,000)*100 = 25%
Desks = (592,900/1,694,000)*100 = 35%
A-2
Chairs should be dropped.
B
Desks
Sales
2,286,900
Direct Material
(830,000)
Direct Labor
(320,000)
Manufacturing Overhead
(680,000)
Total cost
(1,830,000)
Gross profit
456,900
Profit Margin
Desks = (456,900/1,830,000)*100 = 24.97%
Chairs
Desks
Sales
1,240,000
2,286,900
Direct Material
(587,000)
(830,000)
Direct Labor
(150,000)
(320,000)
Manufacturing Overhead
(255,000)
(150,000/470,000)*$799,000
(544,000)
(320,000/470,000)*$799,000
Total cost
(992,000)
(1,694,000)
Gross profit
248,000
592,900