Regular Company produces audio equipment, specifically headphones and speakers. A new CEO has just been hired and announces a new policy that if a product cannot earn a markup of at least 25 percent, it will be dropped. The markup is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $960,000. Overhead is allocated to products based on direct materials 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 speakers from the product line. The company cost analyst estimates that overhead without the speaker line will be $600,000. The revenue and costs for headphones are expected to be the same as last year. What is the estimated markup for headphones in year 2? 

Transcribed Image Text:

Sales revenue.. Direct materials Direct labor.. Headphones $2,156,800 700,000 480,000 Speakers $2,058,000 900,000 240,000