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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

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

?

?

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