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Mastery Problem: Differential Analysis and Product Pricing WoolCorp 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 Raw Wool Wool Yarn Rug Yarn Total Company Sales $210,000 $155.000 $167,000 $532,000 Costs of goods sold: Variable costs ${48,000) 5(18,600) $(37,200) ${103,800) Foxed costs (32,000) (12,400) (24.800) (69,200) Total cost of goods sold $80,000) $(31,000) ${62,000) ${173,000) Gross profit $130,000 $124,000 $105.000 $359,000 Operating expenses: Variable expenses $(5,000) $17,750) $(53,110) ${65,860) Fixed expenses (89.000) (78,000) (106,200) (273,200) Total operating expenses $194,000) $185,750) 56159,310) 5(339,060) Operating income (los) $36,000 $38,250 $154,310) $19.940 Complete the following table using the data in the preceding income statement to compare the effects of dropping the rug yarn line of products. If required, use a minus sign to indicate a loss. Differential Analysis Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn - (Alternative 2) December 31, 2018 Continue Rug Yarn (Alternative 1) Discontinue Rug Yarn (Alternative 2) Differential Effects (Alternative 2) Revenues Costs: Variable Fixed >oft(s) Final Questions Answer the following question (1), then fill in table (2). 1. After reviewing your work on the Continue/Discontinue panel, should WoolCorp continue (Alternative 1) or discontinue (Alternative 2) the rug yarn product line? 2. The following table shows several business decisions that might need to be made across the top row. Along the left-hand column, there are important factors to consider. Select the factor(s) that are important to the decision. Select all that apply. If the factor is not important to any of the decisions, select "yes" on the "Not Important" dropdown, otherwise select "no". Sell or Process Further Make or Buy Lease or Sell Special Price Order Continue or Discontinue Production Bottleneck No Impact on regular prices Contribution margin per bottleneck hour Diferente revenue is more than differentia CON Supplier price is less than WoolCorp's variable cost per unit Robinson Patman Act
