Mastery Problem: Differential Analysis and Product Pricing Wool Corp WooICorp 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 stufng or insulation; (2) wool yarn for use in the textile industry, and {3) extrathick yarn for use in rugs. Upper management Iwould like your recommendations regarding a production decision regarding their cun'ent and proposed product Eines. Continue] Discontinue For the past year, WoolCorp has experimented with its third product, extrathick rug yarn. The company |.yishes to consider I.yhethe-r 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 WoolCorp Condensed Income Statement For the Year Ended December 31, 20Y8 Raw Wool Wool Yarn Rug Yarn Total Company Sales $200,000 $155,000 $177,000 $532,000 Costs of goods sold: Variable costs $(48,000) $(18,600) $(37,170) $(103,770) Fixed costs (32,000) (12,400) (24,800) (69,200) Total cost of goods sold $ (80,000) $(31,000) $(61,970) $(172,970) Gross profit $120,000 $124,000 $115,030 $359,030 Operating expenses: Variable expenses $(5,000) $(7,750) $(53,100) $(65,850) Fixed expenses (89,000) (78,000) (106,200) (273,200) Total operating expenses $(94,000) $(85,750) $(159,300) $(339,050) Operating income (loss) $26,000 $38,250 $ (44,270) $19,980 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, 20Y8 Continue Rug Yarn (Alternative 1) Discontinue Rug Yarn (Alternative 2) Differential Effects (Alternative 2) Revenues $ $ Costs: Variable Fixed Profit (loss)Final Questions Answer the following question {1), then ll in table {2). 1. After reviewing your work on the Continue/Discontinue panel, should Iu'l'oolCorp continue l(.nltematiye 1] or discontinue [Alternative 2] the rug yarn product line? Y 2. The following table shows several business decisions that might need to be made across the top row. Along the lefthand column, there are important factors to consider. Select the factor{5) 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". Lease or Sell or Special Price Continue or Not Sell Process Further Order Make or Buy Discontinue Production Bottleneck Important Impact on regular prices Contribution margin per bottleneck hour Differential revenue is more than differential cost Supplier price is less than WoolCorp's variable cost per unit Sunk costs Robinson-Patman Act