Question 1

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

Manufacturing overhead for year 1 totaled $944,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

	Chairs			Desks
Sales revenue	$	1,156,800		$	2,769,000
Direct materials		600,000			960,000
Direct labor		140,000			450,000

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 $810,000. 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? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal place.)

Question 2

Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing.

Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,142,000 based on production of 320,000 handheld consoles and 108,000 home consoles. Direct labor and direct materials costs were as follows:

	Handheld			Home			Total
Direct labor	$	1,020,500		$	407,000		$	1,427,500
Materials		770,000			702,000			1,472,000

Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows:

				Activity Level
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	450,000		30	15	45
Quality tests performed		512,000		14	18	32
Shipping orders processed		180,000		90	60	150
Total overhead	$	1,142,000

Required:

a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product? (Round "Total cost per unit" to 2 decimal places.)

b. How much overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.)

1000 points McNuty, Inc, produces desis and chairs. A new CFO has just been hired and anrounces a new poikcy that t a product cannot earn a margn of at weas 25 percent twi be aropped. The margin is coputed as prodacd gross prot divided by reported product cost Manufacturing overhead for year 1 totaled $944.000. Overhead is alocated to products based on drect labor cost Data for year 1 show the slowing nect als Direct r 156 800 $2,7600 00 000 90.030 40 000 Required: a-1. Based on the CFO's new polcy calcuiate the prost margin for both chairs and dests a-2. Which of the two products should be dropped? Desks oryear 2todop ??? char peoduct me corpany cost anwyst estraet hat overhead wthout the ea" ine all be $0.1000 The (0o not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal place costs for desks are expected to be the same as last year. Wht is the estmated magin for desks in year 2