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 WoolWool YarnRug YarnTotal CompanySales $200,000 $155,000 $197,000 $552,000 Costs of goods sold: Variable costs$(48,000)$(18,600)$(37,200)$(103,800) Fixed costs(32,000)(12,400)(24,790)(69,190) Total cost of goods sold$(80,000)$(31,000)$(61,990)$(172,990)Gross profit$120,000 $124,000 $135,010 $379,010 Operating expenses: Variable expenses$(5,000)$(7,750)$(53,120)$(65,870) Fixed expenses(89,000)(77,000)(106,200)(272,200) Total operating expenses$(94,000)$(84,750)$(159,320)$(338,070)Operating income (loss)$26,000 $39,250 $(24,310)$40,940

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.

Continue Rug Yarn (Alternative 1)Discontinue Rug Yarn (Alternative 2)Differential Effects (Alternative 2)Revenuesfill in the blankfill in the blankfill in the blankCosts: Variablefill in the blankfill in the blankfill in the blankFixedfill in the blankfill in the blankfill in the blankProfit (loss)fill in the blankfill in the blankfill in the blank

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 SellSell or Process FurtherSpecial Price OrderMake or BuyContinue or DiscontinueProduction BottleneckNot ImportantImpact on regular pricesYesNoYesNoYesNoYesNoYesNoYesNoYesNoContribution margin per bottleneck hourYesNoYesNoYesNoYesNoYesNoYesNoYesNoDifferential revenue is more than differential costYesNoYesNoYesNoYesNoYesNoYesNoYesNoSupplier price is less than WoolCorps variable cost per unitYesNoYesNoYesNoYesNoYesNoYesNoYesNoSunk costsYesNoYesNoYesNoYesNoYesNoYesNoYesNoRobinson-Patman ActYesNoYesNoYesNoYesNoYesNoYesNoYesNo