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 $800,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following. Chairs Desks Sales revenue $ 1,150,000 $ 2,105,000 Direct materials 584,000 800,000 Direct labor 160,000 340,000

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 $650,000. 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
• Req A2
• Req B

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

	Profit Margin
Chairs		%
Desks		%

Which of the two products should be dropped?

	Chairsradio button unchecked1 of 2 Desksradio button unchecked2 of 2

Estimated margin for desks - Year 2

%