Substituting Factors of Production. Denise Warren, vice-president of production at Vanity Fabrics, Inc., believes that a net savings in production cost can be realized by using stronger and more expensive yarn in production. In her opinion, far too much labor time is wasted in working with poor grade yarn that breaks or gets jammed in the knitting machines.

At the present time, 20,000 product units are made with 200,000 yards of yarn costing \(\$ 0.12\) a yard. With a better grade of yarn costing \(\$ 0.25\) a yard, the same number of units could be made with 160,000 yards of yarn.

The standard labor rate is \(\$ 8.50\) per hour, and the standard time to make 20,000 units with the cheaper yarn is 20,000 hours. Warren estimates that with the better yarn, only 16,000 hours will be needed for 20,000 product units.

\section*{Required:}

1. Calculate the standard costs of yarn and labor when using the cheaper yarn.

2. Calculate the standard costs of yarn and labor when using the more expensive yarn.

3. Does a net cost savings exist with the better yarn?

4. Besides the factors previously mentioned relating to current cost savings, give other reasons why better yarn might be favored.