# 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 \$1,071,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following.  ChairsDesksSales revenue\$1,580,800\$2,786,000Direct materials595,000910,000Direct labor230,000400,000 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 \$760,000. 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? 1.) Based on the CFO's new policy, calculate the profit margin for both chairs and desks.  Profit MarginChairs %Desks %  2.) Which of the two products should be dropped? Desk or Chairs? 3.) 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 \$760,000. 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? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)  Estimated margin for desks - Year 2 %

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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 \$1,071,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following.

 Chairs Desks Sales revenue \$1,580,800 \$2,786,000 Direct materials 595,000 910,000 Direct labor 230,000 400,000

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 \$760,000. 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?

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

 Profit Margin Chairs % Desks %

2.) Which of the two products should be dropped? Desk or Chairs?

3.) 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 \$760,000. 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? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)

 Estimated margin for desks - Year 2 %

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Step 1

Net profit margin is the percentage of profit generated divided by the total cost of the product. It shows the sum the product sells for over the expense of producing the product.

Step 2
1. To calculate the profit margin for both the products:                                         Working notes:

Manufacturing Overheads for chairs= (\$1,071,000 ÷ \$630,000) × \$230,000

= \$391,000

Manufacturing Overheads for desks= (\$1,071,000 ÷ \$630,000) × \$400,000

= \$680,000

Total product cost= Direct labor + Direct material + Manufacturing overhead

Profit= Sales revenue – Total product cost

Profit margin= Profit ÷ Total cost

Step 3
1. Chairs should be dropped as their profit margin is less.
2. To calcul...

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