The Scottie Sweater Company produces sweaters under the Scottie label. The company buys raw wool and processes

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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:

Selling price per sweater. . . Cost per sweater to manufacture: Raw materials: $30.00 Wool yarn Buttons, thread, lining.


Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. Current cost and revenue data on the yarn are given below:

Selling price per spindle of yarn.. Cost to manufacture: Raw materials (raw wool) Direct labour... Manufacturing overhea


All of the manufacturing overhead costs are fixed and would not be affected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labour cost. Materials and direct labour costs are variable.


Required:

1. What is the incremental contribution margin (if any) from further processing the wool into sweaters?

2. What is the lowest price that the company should accept for a sweater? Explain.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Related Book For  book-img-for-question

Managerial Accounting

ISBN: 9781259275814

11th Canadian Edition

Authors: Ray H Garrison, Alan Webb, Theresa Libby

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