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 $882,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

	Chairs			Desks
Sales revenue	$	1,346,800		$	2,469,600
Direct materials		588,000			840,000
Direct labor		160,000			330,000

Required:

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

Profit margin 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 $690,000. 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.)

Estimated margin for desks - Year 2 %

Answer 1

Part A		Chairs	Desks	Total
	Sales Revenue	$13,46,800	$24,69,600	$38,16,400
	Direct materials	$5,88,000	$8,40,000	$14,28,000
	Direct labor	$1,60,000	$3,30,000	$4,90,000
	Manufacturing overhead($882,000 in the ratio of 160:330)	$2,88,000	$5,94,000	$8,82,000
	Product costs	$10,36,000	$17,64,000	$28,00,000
	Profit	$3,10,800	$7,05,600	$10,16,400
	Margin(Profit / Product cost)	30.0%	40.0%	36.3%
Part B
		Desks	Total
	Sales Revenue	$24,69,600	$24,69,600
	Direct materials	$8,40,000	$8,40,000
	Direct labor	$3,30,000	$3,30,000
	Manufacturing overhead	$6,90,000	$6,90,000
	Product costs	$18,60,000	$18,60,000
	Profit	$6,09,600	$6,09,600
	Margin(Profit / Product cost)	32.8%	32.8%