Regular Company produces audio equipment, specifically headphones and speakers. A new CEO has just been hired and announces a new policy that if a product cannot earn a markup of at least 25 percent, it will be dropped. The markup is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $960,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following:

	Headphones	Speakers
Sales revenue	$ 2,156,800	$ 2,058,000
Direct materials	700,000	900,000
Direct labor	480,000	240,000

Required:

a-1. Calculate the profit margin for both headphones and speakers.

a-2. Based on the CFO's new policy, 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 speakers from the product line. The company cost analyst estimates that overhead without the speaker line will be $600,000. The revenue and costs for headphones are expected to be the same as last year. What is the estimated markup for headphones in year 2?