2 1 points 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 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 $912,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following. Chairs eBook Sales revenue Direct materials Direct labor $1,278,800 Desks $2,302,500 592,000 200,000 880,000 370,000 Print References 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? 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 $730,000. 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? CK M 2 After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 113,000 units of the Sport model and 46,500 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 22 percent. 2 points Cost Drivers and Cost Driver Volumes-CenterPoint Manufacturing Facility Cost Driver Volume eBook Activity Cost Driver Sport Pro Total Assembling Print Assembly building Setting up machines Handling material Packaging building Inspecting and packing Shipping Machine-hours Setup hours 7,300 Production runs 53 21 31,300 530 53 38,600 583 74 Direct labor-hours Number of shipments 65,200 113 25,400 226 90,600 339 References Third Quarter Unit Cost Report, Activity-Based Costing-CenterPoint Manufacturing Facility Direct material Direct labor Assembly Packaging Total direct labor Direct costs Overhead Assembly building Assembling (@ $30 per MH) Setting up machine (@2 $900 per setup hour) Handling material (@ $3,000 per run) Packaging building Inspecting and packing (@ $5 per direct labor-hour) Shipping (@ $1,320 per shipment) Total ABC overhead Total ABC cost Number of units Unit cost Sport $1,513,000 Pro $2,426,000 $ 763,000 1,003,000 $1,766,000 $ 626,000 386,000 $1,012,000 $3,279,000 $3,438,000 $ 219,000 $ 939,000 47,700 477,000 63,000 159,000 326,000 127,000 149,160 298,320 $ 804,860 $2,000,320 $4,083,860 $ 113,000 36.14 $5,438,320 46,500 $ 116.95 Required: a. Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900. Model Total ABC Overhead Sport Pro