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

Manufacturing overhead for year 1 totaled $1,105,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following.

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 $855,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following.

	Chairs			Desks
Sales revenue	$	1,062,600		$	2,562,500
Direct materials		599,000			950,000
Direct labor		130,000			440,000

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?

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 $800,000. 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?

	Chairs			Desks
Sales revenue	$	1,679,400		$	2,939,150
Direct materials		596,000			920,000
Direct labor		240,000			410,000

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?

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 $770,000. 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?