8. 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 15 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $910,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following.

	Chairs			Desks
Sales revenue	$	1,112,100		$	2,570,400
Direct materials		603,000			990,000
Direct labor		170,000			480,000

Required:

a-1. Based on the CFO's new policy, calculate the margin (as defined by the new CFO) 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 $840,000. 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?

Req A1

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

	Profit Margin
Chairs		%
Desks		%

Req A2

Which of the two products should be dropped?

	Chairs Desks

Req 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 $840,000. 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? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)

Estimated margin for desks - Year 2

%