Mastery Problem: Differential Analysis and Product Pricing WoolCorp Continue/Discontinue Final Questions 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. Mastery Problem: Differential Analysis and Product Pricing WoolCorp Continue/Discontinue Final Questions Continue/Discontinue For the past year, WoolCorp has experimented with its third product, extra-thick rug yarn. The company wishes 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 1 Raw Wool Wool Yarn Rug Yam Total Company 1 Sales $200,000.00 $155,000.00 $197,000.00 $552,000.00 3 Cost of goods sold: 4 Variable costs $48,000.00 $18,600.00 $37,200.00 $103,800.00 5 Fixed costs 32,000.00 12,400.00 24,780.00 69,180.00 6 Total cost of goods sold $80,000.00 $31,000.00 $61,980.00 $172,980.00 7 Gross profit $120,000.00 $124,000.00 $135,020.00 $379,020.00 8 Operating expenses: 9 Variable expenses $5,000.00 $7,750.00 $53,080.00 $65,830.00 10 Fixed expenses 89,000.00 77,000.00 106,200.00 272,200.00 11 Total operating expenses $94,000.00 $84,750.00 $159,280.00 $338,030.00 12 Income (Loss) from operations $26,000.00 $39,250.00 $(24,260.00) $40,990.00 WoolCorp Continue/Discontinue Final Questions Continue/Discontinue 10 Fixed expenses 89,000.00 77,000.00 106,200.00 272,200.00 11 Total operating expenses $94,000.00 $84,750.00 $159,280.00 $338,030.00 12 Income (Loss) from operations $26,000.00 $39,250.00 $(24,260.00) $40,990.00 Complete the following table using the data in the preceding income statement compare the effects of dropping the rug yarn line of products. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter "O". Differential Analysis Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn (Alternative 2) December 31, 20Y8 Discontinue Differential Effect Continue Rug Yarn (Alternative 1) Rug Yarn (Alternative 2) on Income (Alternative 2) 2 Revenues 3 Costs: 4 Variable 5 Fixed 6 Income (Loss) WoolCorp Continue/Discontinue Final Questions 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? The company is indifferent between Alternative 1 and Alternative 2. O Continue (Alternative 1) O Discontinue (Alternative 2) 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. Choose the factor(s) that are important to the decision. Check all that apply. If the factor is not important to any of the decisions, check the "Not Important box. . " Lease or Sell Sell or Process Further Special Price Order Make or Buy Continue or Discontinue Production Bottleneck Not Important Impact on regular prices Contribution margin per bottleneck hour 0 Differential revenue is more than differential cost O Supplier price is less than WoolCorp's variable cost per unit OOOOOO O OOO OOO 0 0 0 0 0 0 0 0 0 | 0 0 Sunk costs O Robinson-Patman Act