Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 profit margin for both chairs and desks.

Profit Margin
Chairs %
Desks %

a-2. Which of the two products should be dropped, chairs or desks?

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?

Estimated margin for desks - Year 2 %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Sound Investing, Chapter 17 - Off-Balance-Sheet Shams

Authors: Kate Mooney

1st Edition

0071719393, 9780071719391

More Books

Students also viewed these Accounting questions