1.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 30 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $799,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

	Chairs			Desks
Sales revenue	$	1,240,000		$	2,286,900
Direct materials		587,000			830,000
Direct labor		150,000			320,000

Required:

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

	Profit margin
Chairs	?%
Desks	?%

a-2. Which of the two products should be dropped?

	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 $680,000. 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

?%

2.Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing.

Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,426,000 based on production of 360,000 handheld consoles and 92,000 home consoles. Direct labor and direct materials costs were as follows:

	Handheld			Home			Total
Direct labor	$	1,368,500		$	414,000		$	1,782,500
Materials		740,000			662,000			1,402,000

Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows:

				Activity Level
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	650,000		45	5	50
Quality tests performed		580,000		13	16	29
Shipping orders processed		196,000		90	50	140
Total overhead	$	1,426,000

Required:

a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product? (Round "Total cost per unit" to 2 decimal places.)

	Overhead	Total Cost per Unit
Handheld	?	?
Home	?	?

b. How much overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.)

	Overhead	Total Cost per Unit
Handheld	?	?
Home	?	?