Question

I don't understand this. Last year [year 1), we decided to drop our highest-end Red model and only produce the Yellow and Green models, because the cost system indicated we were losing money on Red. Now, looking at the preliminary numbers, our profit is actually lower than last year and it looks like Yellow has become a money loser, even though our prices, volumes, and direct costs are the same. Can someone please explain this to me and maybe help me decide what to do next year? Robert Dolan President & CEO Dolan Products Dolan Products is a small, family-owned audio component manufacturer. Several years ago, the company decided to concentrate on only three models, which were sold under many brand names to electronic retailers and mass-market discount stores. For internal purposes, the company uses the product names Red, Yellow, and Green to refer to the three components. Data on the three models and selected costs follow. Red Total 44,000 Year 1 Units produced and sold Sales price per unit Direct materials cost per unit Direct labor-hours per unit Wage rate per hour Total manufacturing overhead 8, eee $120 $ 85 2 $ 10 Yellow 13,000 $ 95 $ 65 1 $ 10 Green 23,000 $ 70 $ 45 0.5 $ 10 $607,500 This year (year 2), the company only produced the Yellow and Green models. Total overhead was $563,500. All other volumes, unit prices, costs, and direct labor usage were the same as in year 1. The product cost system at Dolan Products allocates manufacturing overhead based on direct labor-hours. Required: a. Compute the product costs and gross margins (revenue less cost of goods sold) for the three products and total gross profit (loss) for year 1. b. Compute the product costs and gross margins (revenue less cost of goods sold) for the two remaining products and total gross profit (loss) for year 2. c. Should Dolan Products drop Yellow for year 3?

Answer 1

Required A Product cost per unit Gross margin (loss) per unit Total gross profit (loss) Red Yellow Green Total $135 $90 $57.50 ($15) $5 $12.50 ($120,000) $65,000 $287,500 $232,500 Required B Product cost per unit Gross margin (loss) per unit Total gross profit (loss) Yellow Green Total $98 $61.50 ($3) $8.50 ($39,000) $195,500 $156,500 Required C Dolan Products should not drop Yellow for year 3.

F Nm 4 A B с D E 1 Year 1 2 Total manufacturing overhead = $607,500 3 Red Yellow Green Total 5 Units produced and sold 8,000 13,000 23,000 44,000 6 Direct labor-hours per unit 2 1 0.5 7 Direct labor-hours required 16,000 13,000 11,500 40,500 8 Manufacturing overhead allocated 240,000 195,000 172,500 607,500 9 Manufacturing overhead per unit 30 15 7.5 10 11 Red Yellow Green 12 Direct materials cost per unit $85 $45 13 Direct labor-cost per unit 20 10 5 14 Manufacturing overhead per unit 30 15 7.5 15 Product cost per unit $135 $90 $57.50 16 17 Sales price per unit $120 $95 $70 18 Product cost per unit 135 90 57.50 19 Gross margin (loss) per unit ($15) $5 $12.50 20 21 Units produced and sold 8,000 13,000 23,000 22 Gross margin (loss) per unit ($15) 5 12.5 23 Total gross profit (loss) ($120,000) $65,000 $287,500 $232,500 24 $65

A B С D E 1 Year 1 2 Total manufacturing overhead = $607,500 3 Red Green Total 8000 Yellow 13000 1 44000 23000 0.5 2 =C5*C6 =B5 B6 =(B7/E7)*607500 =B8/B5 =D5 D6 =(D7/E7)*607500 =D8/D5 =B7+C7+D7 607500 =(C7/E7)*607500 =C8/C5 Red Yellow 85 65 4 5 Units produced and sold 6 Direct labor-hours per unit 7 Direct labor-hours required 8 Manufacturing overhead allocated 9 Manufacturing overhead per unit 10 11 12 Direct materials cost per unit 13 Direct labor-cost per unit 14 Manufacturing overhead per unit 15 Product cost per unit 16 17 Sales price per unit 18 Product cost per unit 19 Gross margin (loss) per unit 20 21 Units produced and sold 22 Gross margin (loss) per unit 23 Total gross profit (loss) 24 =10*B6 30 =SUM(B12:B14) =10*C6 15 =SUM(C12:C14) Green 45 =10*D6 7.5 =SUM(D12:014) 120 95 70 135 90 57.5 =D17-D18 =B17-B18 =C17-C18 8000 13000 5 23000 12.5 - 15 =B21*B22 =C21*C22 =D21*D22 =B23+C23+D23

B E A C D 1 Year 2 2 Total manufacturing overhead = $563,500 3 4 Yellow Green Total 5 Units produced and sold 13,000 23,000 36,000 6 Direct labor-hours per unit 1 0.5 7 Direct labor-hours required 13,000 11,500 24,500 8 Manufacturing overhead allocated 299,000 264,500 563,500 9 Manufacturing overhead per unit 23 11.5 10 11 Yellow Green 12 Direct materials cost per unit $45 13 Direct labor-cost per unit 10 5 14 Manufacturing overhead per unit 23 11.5 15 Product cost per unit $98 $61.50 16 17 Sales price per unit $95 $70 18 Product cost per unit 98 61.50 19 Gross margin (loss) per unit ($3) $8.50 20 21 Units produced and sold 13,000 23,000 22 Gross margin (loss) per unit ($3) $8.50 23 Total gross profit (loss) ($39,000) $195,500 $156,500 24 $65

A B С D E 1 Year 2 2 Total manufacturing overhead = $563,500 3 4 Green Total Yellow 13000 23000 36000 1 0.5 =B5*B6 = (B7/D7)*563500 =B8/B5 =C5*C6 = (C7/07)*563500 =C8/C5 =B7+C7 563500 Yellow 65 =10*B6 5 Units produced and sold 6 Direct labor-hours per unit 7 Direct labor-hours required 8 Manufacturing overhead allocated 9 Manufacturing overhead per unit 10 11 12 Direct materials cost per unit 13 Direct labor-cost per unit 14 Manufacturing overhead per unit 15 Product cost per unit 16 17 Sales price per unit 18 Product cost per unit 19 Gross margin (loss) per unit 20 21 Units produced and sold 22 Gross margin (loss) per unit 23 Total gross profit (loss) 24 Green 45 =10*C6 11.5 =SUM(C12:C14) 23 =SUM(B12:B14) 95 70 98 61.5 =C17-C18 =B17-B18 13000 23000 -3 8.5 =B21*B22 =C21*C22 =B23+C23