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

Manufacturing overhead for year 1 totaled $630,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

ChairsDesksSales revenue$1,106,400$2,033,200Direct materials586,000820,000Direct labor140,000310,000

Required:

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

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

ChairsDesks

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 $670,000. 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.)

2)Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the baseball bats, and Department T produces the tennis rackets. Munoz currently uses plantwide allocation to allocate its overhead to all products. Direct labor cost is the allocation base. The rate used is 100 percent of direct labor cost. Last year, revenue, materials, and direct labor were as follows:

Baseball BatsTennis RacketsSales revenue$1,540,000$1,000,000Direct labor340,000170,000Direct materials561,000283,000

Required:

a.Compute the profit for each product using plantwide allocation.

b.Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 50 percent of direct labor cost and Department T would have had a rate of 200 percent of direct labor cost. Recompute the profits for each product using each departments allocation rate (based on direct labor cost).

3)Main Street Ice Cream Company uses a plantwide allocation method to allocate overhead based on direct labor-hours at a rate of $3 per labor-hour. Strawberry and vanilla flavors are produced in Department SV. Chocolate is produced in Department C. Sven manages Department SV and Charlene manages Department C. The product costs (per thousand gallons) follow:

StrawberryVanillaChocolateDirect labor (per 1,000 gallons)$768$843$1,143Raw materials (per 1,000 gallons)818518618

Required:

a.If the number of hours of labor per 1,000 gallons is 60 for strawberry, 70 for vanilla, and 100 for chocolate, compute the total cost of 1,000 gallons of each flavor using plantwide allocation.

b.Charlene's department uses older, outdated machines. She believes that her department is being allocated some of the overhead of Department SV, which recently bought state-of-the-art machines. After she requested that overhead costs be broken down by department, the following information was discovered:

Department SVDepartment COverhead$93,906$38,665Machine-hours25,38037,800Labor-hours25,38018,500

Using machine-hours as the department allocation base for Department SV and labor-hours asthe department allocation base for Department C, compute the allocation rate for each.(Round your answers to 2 decimal places.)

c.Compute the cost of 1,000 gallons of each flavor of ice cream using the department allocation rates computed in requirement(b)if the number of machine-hours for 1,000 gallons of each of the three flavors of ice cream are as follows: strawberry, 60; vanilla, 70; and chocolate, 168.Direct labor-hours by product remain the same as in requirement(a).