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 $1,032,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following: Sales revenue Direct materials Direct labor Headphones $ 2,339,200 760,000 504,000 Speakers $ 2,226,600 960,000 264,000 Required: a-1. Calculate the markup 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 $660,000. 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?

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 $1,032,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following: Sales revenue Direct materials Direct labor Headphones $ 2,339,200 760,000 504,000 Speakers $ 2,226,600 960,000 264,000 Required: a-1. Calculate the markup 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 $660,000. 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?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

Problem 22E: Ellerson Company provided the following information for the last calendar year: During the year,...

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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 $1,056,000. Overhead is allocated to products based on direct materials cost. Data for year 1 show the following: Sales revenue Direct materials Direct labor Req A1 Required: a-1. Calculate the markup 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 $680,000. The revenue and costs for headphones are expected to be the same as last year. What is the estimated markup for…
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