CASE 13-29 Sell or Process Further Decision L013-7 The Scottie Sweater Company produces sweaters under the "Scottie" label. The company buys raw wool and processes it into wool yam 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 fecent 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 continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn of 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 lo discount the selling price of the sweaters to $30 from the normal $40 price, Since the market for nool yarn has renained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued; she is upset about having to sell sweaters at a $2.50 loss when the yarn could be sold for a $4.00 profit. However, the production superintendent does not want to close down a lange portion of the factory. He argues that the company is in the sweater business, not the yarn business, and the company should focus on its core strength. All of the matrufucturing owerhead costs are fixed and would not be affected even if sweaters were discontinued, Manufacturing onethead is msigned to produets on the basis of 150% of direct labor cost. Materials and eirect labor costs are variable. Requireo: 1. What is the flrancial advantage (disadvantwo) of fur ther processing one spindle of wool yarn into a sweater? 2. Would you necommeod that the wool yarn be sold outripht or processed into sweaters? Explain. 3. What is the lowest prike that the company should accept for a sweater Support your answer with appropeiate computations and explain CASE 13-29 Sell or Process Further Decision L013-7 The Scottie Sweater Company produces sweaters under the "Scottie" label. The company buys raw wool and processes it into wool yam 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 fecent 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 continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn of 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 lo discount the selling price of the sweaters to $30 from the normal $40 price, Since the market for nool yarn has renained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued; she is upset about having to sell sweaters at a $2.50 loss when the yarn could be sold for a $4.00 profit. However, the production superintendent does not want to close down a lange portion of the factory. He argues that the company is in the sweater business, not the yarn business, and the company should focus on its core strength. All of the matrufucturing owerhead costs are fixed and would not be affected even if sweaters were discontinued, Manufacturing onethead is msigned to produets on the basis of 150% of direct labor cost. Materials and eirect labor costs are variable. Requireo: 1. What is the flrancial advantage (disadvantwo) of fur ther processing one spindle of wool yarn into a sweater? 2. Would you necommeod that the wool yarn be sold outripht or processed into sweaters? Explain. 3. What is the lowest prike that the company should accept for a sweater Support your answer with appropeiate computations and explain
