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 %

Question
Asked Nov 6, 2019
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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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Expert Answer

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

Chairs
Desks
Total
Sales revenue
$1,580,800
$230,000
$2,786,000
S400,000
S910,000
S680,000
$4,366,800
$630,000
$1,505,000
$1,071,000
Direct labor
$595,000
$391,000
Direct materials
Manufacturing
Overhead
Total Product cost
$3,206,000
$1,160,800
$1,216,000
$364,800
S1,990,000
796,000
40%
Profit
Profit margin
30%
36.21%
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Chairs Desks Total Sales revenue $1,580,800 $230,000 $2,786,000 S400,000 S910,000 S680,000 $4,366,800 $630,000 $1,505,000 $1,071,000 Direct labor $595,000 $391,000 Direct materials Manufacturing Overhead Total Product cost $3,206,000 $1,160,800 $1,216,000 $364,800 S1,990,000 796,000 40% Profit Profit margin 30% 36.21%

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

Desks
Sales revenue
Direct labor
Direct materials
Manufacturing
Overhead
Total Product cost
S2,786,000
S400,000
S910,000
$760,000
$2,070,000
S716,000
Profit
Profit margin
34.5%
help_outline

Image Transcriptionclose

Desks Sales revenue Direct labor Direct materials Manufacturing Overhead Total Product cost S2,786,000 S400,000 S910,000 $760,000 $2,070,000 S716,000 Profit Profit margin 34.5%

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