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 35 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $945,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following. Chairs Desks Sales revenue $ 1,302,600 $ 3,017,000 Direct materials 602,000 980,000 Direct labor 160,000 470,000 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

Answer 1

a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks.

• chairs = 20.2%
• desks = 45.52%

a-2. Which of the two products should be dropped

• chairs

Step-by-step explanation:

Chairs Desks

Sales revenue $1,302,600 $3,017,000

Direct materials $602,000 $980,000

Direct labor $160,000 $470,000

Overhead $321,702 $623,298

Gross profit $218,898 $943,702

Margin 20.2% 45.52%

overhead costs for chairs = [$160,000 / ($160,000 + $470,000)] x $945,000 = $321,702

overhead costs for desks = $945,000 - $321,702 = $623,298

35% margin = gross profit / COGS

chairs = $218,898 / $1,083,702 = 0.202 or 20.2%

desks = $943,702 / $2,073,298 = 0.4552 or 45.52%