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 35 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $945,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following. Chairs Desks Sales revenue $ 1,302,600 $ 3,017,000 Direct materials 602,000 980,000 Direct labor 160,000 470,000 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

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

Explanation:

                                     Chairs                 Desks

Sales revenue           $1,302,600        $3,017,000

Direct materials          $602,000          $980,000

Direct labor                  $160,000          $470,000

Overhead                     $321,702          $623,298

Gross profit                  $218,898          $943,702

Margin                              20.2%             45.52%

overhead costs for chairs = [$160,000 / ($160,000 + $470,000)] x $945,000 = $321,702

overhead costs for desks = $945,000 - $321,702 = $623,298

35% margin = gross profit / COGS

chairs = $218,898 / $1,083,702 = 0.202 or 20.2%

desks = $943,702 / $2,073,298 = 0.4552 or 45.52%

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