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.

Year 1	Red			Yellow			Green			Total
Units produced and sold		5,000			10,000			20,000			35,000
Sales price per unit	$	150		$	100		$	75
Direct materials cost per unit	$	70		$	50		$	30
Direct labor-hours per unit		2			1			0.5
Wage rate per hour	$	20		$	20		$	20
Total manufacturing overhead										$	750,000

This year (year 2), the company only produced the Yellow and Green models. Total overhead was $650,000. 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?

PICTURES ARE FOR REFERENCE. THE VERBAGE ABOVE IS THE SAME INFORMATION!

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. Total 35,000 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 Red 5,000 $ 150 $ 70 2 $ 20 Yellow 10,000 $ 100 $ 50 1 $ 20 Green 20,000 $ 75 $ 30 0.5 $ 20 $750,000 This year (year 2), the company only produced the Yellow and Green models. Total overhead was $650,000. 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

Answer with working is given below

Working note Yellow 10,000 Output Direct Labor hours Total DL Hours Red 5,000 2.00 10,000 Green 20,000 0.50 10,000 1.00 10,000 Direct Labor hour rate Total Overheads DL hours $750,000 30,000 $25.00 Total Red $150.00 Yellow $100.00 Green $75.00 Sales price Less: Direct Material Direct Labor Overhead Product cost per unit $70.00 $40.00 $50.00 $160.00 $50.00 $20.00 $25.00 $95.00 $30.00 $10.00 $12.50 $52.50 Gross profit/(Loss) Total Gross profit/(Loss) -$10.00 - $50,000 $5.00 $50,000 $22.50 $450,000 $450,000 Direct Labor hour rate Total Overheads DL hours $650,000 20,000 $32.50 Total | Yellow $100.00 Green $75.00 Sales price Less: Direct Material Direct Labor Overhead Product cost per unit $50.00 $20.00 $32.50 $102.50 $30.00 $10.00 $16.25 $56.25 Gross profit/(Loss) Total Gross profit/(Loss) -$2.50 $25,000 $18.75 $375,000 $350,000 Dolan should not drop Yellow for year 3 Because the entire Overhead has to be absorbed by Green only