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 on sales of at least 20 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $800,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

Required
a. Which product(s), if any, would be dropped based on the CFO's new policy? Show computations.
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 $650,000. 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?

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Chairs Desks Sales revenue . $1,150,000 $2,105,000 584,000 160,000 800,000 340,000 Direct labor. .