Assignment
Dolan Products is a small, family owned audio component manufacturer. Several years ago, the company decided to concentrate on only three models, which were sold under many brand names to electronic retailers and mass-market discount stores. For internal purposes, the company uses the product names Red, Yellow, and Green to refer to the three components. Data on the three models and selected costs follow:
Year 1 Red Yellow Green Total
Units produced and sold 5000 10000 20000 35000
Sales price per unit 150 100 75
Direct materials cost per unit 70 50 30
Direct labor-hours per unit 2 1 0.5
Wage rate per hour 20 20 20
Total manufacturing overhead. 750000
This year (year 2), the company only produced the Yellow and Green models. Total overhead was $650,000. All other volumes, unit prices, costs, and direct labor usage were the same as in year 1. The product cost system at Dolan Products allocates manufacturing overhead based on direct labor hours.
Required
a. Compute the product costs and gross margins (revenue less cost of goods sold) for the three products and total gross profit t for year 1.
b. Compute the product costs and gross margins (revenue less cost of goods sold) for the two remaining products and total gross profit t for year 2.
c. Should Dolan Products drop Yellow for year 3? Explain.