Mastery Problem: Differential Analysis and Product Pricing

WoolCorp

WoolCorp buys sheeps 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. Youve 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.

Question Content Area

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		$200,000			$155,000			$177,000		$532,000
Costs of goods sold:
Variable costs	$(48,000)	$(18,600)	$(37,200)	$(103,800)
Fixed costs	(32,000)	(12,400)	(24,800)	(69,200)
Total cost of goods sold	$(80,000)	$(31,000)	$(62,000)	$(173,000)
Gross profit	$120,000	$124,000	$115,000	$359,000
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	$(44,300)	$19,950

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	$fill in the blank 3771da00607bfa1_1	$fill in the blank 3771da00607bfa1_2	$fill in the blank 3771da00607bfa1_3
Costs:
Variable	fill in the blank 3771da00607bfa1_4	fill in the blank 3771da00607bfa1_5	fill in the blank 3771da00607bfa1_6
Fixed	fill in the blank 3771da00607bfa1_7	fill in the blank 3771da00607bfa1_8	fill in the blank 3771da00607bfa1_9
Profit (loss)	$fill in the blank 3771da00607bfa1_10	$fill in the blank 3771da00607bfa1_11	$fill in the blank 3771da00607bfa1_12

Question Content Area

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?

Continue (Alternative 1).Discontinue (Alternative 2).The company is indifferent between Alternative 1 and 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.

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".

	Lease or Sell	Sell or Process Further	Special Price Order	Make or Buy	Continue or Discontinue	Production Bottleneck	Not Important
Impact on regular prices	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Contribution margin per bottleneck hour	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Differential revenue is more than differential cost	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Supplier price is less than WoolCorps variable cost per unit	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Sunk costs	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Robinson-Patman Act	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo