CASE 1329 Sell or Process Further Decision [013-7 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: 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 contuning 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: The market for sweaters is temporarily depressed, due to unusually warm weather in the western states where the sweaters are sold. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained srone, the dispute has again surficed over whether the yam should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweater should be discontinued; she is upset about having to sell sweafers at a $2.50 loss when the yarn coald be sold for a $4.00 proft. Hewewe, the production superintendent does not want to close down a large portion of the factory. He argues that the company is in the sweater business, not the yarn business, and the company should foces on its eore strength. All of the manufacturing owerhead conts ate fixed and would not be affected even if sweaters wete discontinued. Manufacturing ovethead is astigned to products on the basis of 1502 of direct labor cost. Materials and direct labor costs are variable. Required: 1. What is the financial advatate (disadvantage) of further processing one spindle of wool yarn into a sweater? 2. Woals you recoinmend that the wool yarn be sold outright or processed into sweaters? Explain. 3. What is the lowest price that the company should accept for a sweater? Suppott your answer with appropriate computations and explain xout reatoaing: CASE 1329 Sell or Process Further Decision [013-7 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: 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 contuning 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: The market for sweaters is temporarily depressed, due to unusually warm weather in the western states where the sweaters are sold. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained srone, the dispute has again surficed over whether the yam should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweater should be discontinued; she is upset about having to sell sweafers at a $2.50 loss when the yarn coald be sold for a $4.00 proft. Hewewe, the production superintendent does not want to close down a large portion of the factory. He argues that the company is in the sweater business, not the yarn business, and the company should foces on its eore strength. All of the manufacturing owerhead conts ate fixed and would not be affected even if sweaters wete discontinued. Manufacturing ovethead is astigned to products on the basis of 1502 of direct labor cost. Materials and direct labor costs are variable. Required: 1. What is the financial advatate (disadvantage) of further processing one spindle of wool yarn into a sweater? 2. Woals you recoinmend that the wool yarn be sold outright or processed into sweaters? Explain. 3. What is the lowest price that the company should accept for a sweater? Suppott your answer with appropriate computations and explain xout reatoaing