The Scottie Sweater Company produces sweaters under the \"Scottie\" label. The c

Question

The Scottie Sweater Company produces sweaters under the "Scottie" label. The company buys raw wool and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one sweater. The costs and revenues associated with the sweaters are given below $ 39.00 Selling price Cost to manufacture Raw materials Buttons, thread, lining 2.00 Wool yarn 18.00 Total raw materials Direct labor Manufacturing overhead 20.00 8.40 12.60 41.00 Manufacturing profit (loss) s (2.00) Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. The yarn is purchased by other companies for use in production of wool blankets and other wool products. Since the development of the market for the wool yarn, a continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below Per Spindle of Yarn Selling price Cost to manufacture 26.00 $11.00 Raw materials (raw wool) Direct labor Manufacturing overhead 3.60 3.40 18.00 Manufacturing profit 8.00

Explanation / Answer

Determine the increase or Decrease in contribution if yarn is Further Processed Description Per Sweater Increase in Revenue ($39-$26) $13.00 Increase in Cost Button, Thread, Lining $2.00 Direct Labour $8.40 $10.40 Increased in contribution $2.60 Note: Cost of Yarn is an Unavoidable cost    1. b) Yes, the company should further process the yarn it result an addition contribution margin of $2.40/Sweater 2. Computation of Lowest price accepted for Sweater Description Amount Amount Variable Cost Raw Wool $11.00 Direct Labour ($3.60+$8.40) $12.00 Button, thread , Lining $2.00 Total Variable Cost $25.00 Opportunity Cost *** $11.40 Lowest Selling Price should be $36.40 *** contribution margin from selling of yarn spindle $11.40 ($26-($11+$3.60)

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