WoolCorp buys sheep’s wool from farmers. The company began operations in January
ID: 2567466 • Letter: W
Question
WoolCorp buys sheep’s wool from farmers. The company began operations in January of this year, and is making decisions on product offerings, pricing, and vendors. The company is also examining its method of assigning overhead to products. You’ve just been hired as a production manager at WoolCorp.
Currently WoolCorp makes three products: (1) raw, clean wool to be used as stuffing or insulation; (2) wool yarn for use in the textile industry, and (3) extra-thick yarn for use in rugs.
Upper management would like your recommendations regarding a production decision regarding their current and proposed product lines.
Continue/Discontinue
For the past year, WoolCorp has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. You decide to prepare a differential analysis of the income related to all three products. To begin your analysis, you review the following condensed income statement. Then scroll down to complete the differential analysis.
WoolCorp
Condensed Income Statement
For the Year Ended December 31, 20Y8
1
Raw Wool
Wool Yarn
Rug Yarn
Total Company
2
Sales
$210,000.00
$155,000.00
$197,000.00
$562,000.00
3
Cost of goods sold:
4
Variable costs
$48,000.00
$18,600.00
$37,160.00
$103,760.00
5
Fixed costs
32,000.00
12,400.00
24,780.00
69,180.00
6
Total cost of goods sold
$80,000.00
$31,000.00
$61,940.00
$172,940.00
7
Gross profit
$130,000.00
$124,000.00
$135,060.00
$389,060.00
8
Operating expenses:
9
Variable expenses
$5,000.00
$7,750.00
$53,120.00
$65,870.00
10
Fixed expenses
89,000.00
77,500.00
106,200.00
272,700.00
11
Total operating expenses
$94,000.00
$85,250.00
$159,320.00
$338,570.00
12
Income (loss) from operations
$36,000.00
$38,750.00
$(24,260.00)
$50,490.00
Complete the following table using the data in the preceding income statements to compare the effects of dropping the rug yarn line of products. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter “0”.
Differential Analysis
Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn (Alternative 2)
December 31, 20Y8
1
Continue Rug Yarn (Alternative 1)
Discontinue Rug Yarn (Alternative 2)
Differential Effect on Income (Alternative 2)
2
Revenues
3
Costs:
4
Variable
5
Fixed
6
Income (loss)
WoolCorp
Condensed Income Statement
For the Year Ended December 31, 20Y8
Explanation / Answer
DIFFERENTIAL ANALYSIS CONTINUE RUG YEAR(ALTERNATIVE 1) OR DISCONTINUE RUG YARN (ALTERNATIVE 2) ALTERNATIVE -1 ALTERNATIVE -2 DIFFERENTIAL EFFECT ON INCOME Revenue 562000 365000 -197000 Less: Costs: Variable 169630 79350 90280 Fixed 341880 341880 0 Income (Loss) 50490 -56230 -106720 Hence, Rug Yarn Should not be discontinued as it will result in loss of $ 106,720
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