Question 1 McNulty, Inc., produces desks and chairs. A new CFO has just been hir

Question

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:

Direct labor

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:

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

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.)

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

Direct labor

140,000 450,000 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

Explanation / Answer

Q1 Particulars Chairs Desks Sales Revenue 1156800 2769000 Manuafcturing OH 944000 Direct Material 600000 960000 Particulars Chairs Desks Total Direct Labor 140000 450000 Direct Labor 140000 450000 590000 Manuafcturing OH 224000 720000 Total Costs 964000 2130000 Manuafcturing OH 224000 720000 944000 (Allocated basis DL) A1 Profit as per New Policy 241000 532500 (25% of Total Costs) A2 Particulars Chairs Desks Sales Revenue 1156800 2769000 Direct Material 600000 960000 Direct Labor 140000 450000 Manuafcturing OH 224000 720000 Total Costs 964000 2130000 Net Gain 192800 639000 Since Chairs has below expectation profit it should be dropped B Particulars Chairs Sales Revenue 2769000 Direct Material 960000 Direct Labor 450000 Manuafcturing OH 810000 Total Costs 2220000 Net Gain 549000 Q2 Particulars Handheld Home Total Manuafcturing OH 1142000 Units 320000 108000 Direct Material 770000 702000 1472000 Direct Labor 1020500 407000 1427500 A Calculation of Cost per Activity Pools: (Cost/Total Activity) Cost Driver Cost Handheld Home Total Cost per Activity Number of production runs 450000 30 15 45 10000 Per Prod Run Quality tests performed 512000 14 18 32 16000 Per Test Shipping orders processed 180000 90 60 150 1200 Per Order Total overhead 1142000 Particulars Handheld Home Number of production runs 300000 150000 (Cost per Activity*Activity for each Product) Quality tests performed 224000 288000 (Cost per Activity*Activity for each Product) Shipping orders processed 108000 72000 (Cost per Activity*Activity for each Product) Total Allocation 632000 510000 Total Units 320000 108000 M Cost per PU 1.98 4.72 Particulars Handheld Home Direct Material 2.41 6.50 (Cost/Units) Direct Labor 3.19 3.77 (Cost/Units) M Cost per PU 1.98 4.72 Total Cost 7.58 14.99 B Manuafcturing OH 1142000 Total Direct Labor Cost 1427500 Per Direct Labor $ Cost 0.80 Particulars Handheld Home Direct Material 2.41 6.50 (Cost/Units) Direct Labor 3.19 3.77 (Cost/Units) Manuafcturing OH 2.55 3.02 (Labor Cost*0.80) Total Cost 8.15 13.29

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