I dont understand this Last year year 1 , we decided to drop our highest end Red model and only produce the Yellow and Green models, because the cost system indicated we were losing money on Red Now, looking at the preliminary numbers, our profit is actually lower than last year and it looks like Yellow has become a money loser, even though our prices, volumes, and direct costs are the same Can someone please explain this to me and maybe help me decide what to do next year Robert Dolan President CEO Dolan Products Dolan Products is a small, family owned audio component manufacturer Several years ago, the company decided to concentrate on only three models, which were sold under many brand names to electronic retailers and mass market discount stores For internal purposes, the company uses the product names Red, Yellow, and Green to refer to the three components Data on the three models and selected costs follow Year 1 Red Yellow Green Total Units produced and sold 6,000 11,000 21,000 38,000 Sales price per unit $ 160 $ 130 $ 60 Direct materials cost per unit $ 75 $ 55 $ 35 Direct labor hours per unit 3 2 0 3 Wage rate per hour $ 13 $ 13 $ 13 Total manufacturing overhead $833,400 This year (year 2), the company only produced the Yellow and Green models Total overhead was $764,100 All other volumes, unit prices, costs, and direct labor usage were the same as in year 1 The product cost system at Dolan Products allocates manufacturing overhead based on direct labor hours Required a Compute the product costs and gross margins (revenue less cost of goods sold) for the three products and total gross profit for year 1 (Do not round intermediate calculations Negative amounts should be indicated by a minus sign Round your answers to 2 decimal places ) b Compute the product costs and gross margins (revenue less cost of goods sold) for the two remaining products and total gross profit for year 2 (Do not round intermediate calculations Negative amounts should be indicated by a minus sign Round your answers to 2 decimal places ) c Should Dolan Products drop Yellow for year 3 Yes No

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I dont understand this. Last year [year 1], we decided to drop our highest-end Red model and only produce the Yellow and Green models, because

I dont understand this. Last year [year 1], we decided to drop our highest-end Red model and only produce the Yellow and Green models, because the cost system indicated we were losing money on Red. Now, looking at the preliminary numbers, our profit is actually lower than last year and it looks like Yellow has become a money loser, even though our prices, volumes, and direct costs are the same. Can someone please explain this to me and maybe help me decide what to do next year?

Robert Dolan

President & CEO

Dolan Products

Dolan Products is a small, family-owned audio component manufacturer. Several years ago, the company decided to concentrate on only three models, which were sold under many brand names to electronic retailers and mass-market discount stores. For internal purposes, the company uses the product names Red, Yellow, and Green to refer to the three components.

Data on the three models and selected costs follow:

Year 1	Red		Yellow		Green		Total
Units produced and sold	6,000		11,000		21,000		38,000
Sales price per unit	$	160	$	130	$	60
Direct materials cost per unit	$	75	$	55	$	35
Direct labor-hours per unit		3		2		0.3
Wage rate per hour	$	13	$	13	$	13
Total manufacturing overhead							$833,400

This year (year 2), the company only produced the Yellow and Green models. Total overhead was $764,100. All other volumes, unit prices, costs, and direct labor usage were the same as in year 1. The product cost system at Dolan Products allocates manufacturing overhead based on direct labor hours.

Required:

a. Compute the product costs and gross margins (revenue less cost of goods sold) for the three products and total gross profit for year 1. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

b. Compute the product costs and gross margins (revenue less cost of goods sold) for the two remaining products and total gross profit for year 2. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

c. Should Dolan Products drop Yellow for year 3?