Mastery Problem: Differential Analysis and Product Pricing 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. 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, 2018 Raw Wool Wool Yarn Rug Yarn Total Company Sales $210,000 $155,000 $197,000 $562,000 Costs of goods sold: A Variable costs $(48,000) $(18,600) $(37,190) $(103,790) Fixed costs (32,000) (12,400) (24,800) (69,200) Total cost of goods sold $(80,000) $(31,000) $(61,990) $(172,990) Gross profit $130,000 $124,000 $135,010 $389,010 Operating expenses: Variable expenses $(5,000) $(7,750) $(53,080) $(65,830) Fixed expenses (89,000) (77,000) (106,200) (272,200) Total operating expenses $(94,000) $(84,750) $(159,280) $(338,030) Operating income (loss) $36,000 $39,250 $(24,270) $50,980 Complete the following table using the data in the preceding income statement to compare the effects of dropping the rug yarn line 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, 2018 Continue Rug Yarn (Alternative 1) Discontinue Rug Yarn (Alternative 2) Differential Effects (Alternative 2) Check My Work Fixed expenses (89,000) (77,000) (106,200) (272,200) Total operating expenses $(94,000) $(84,750) $(159,280) $(338,030) Operating income (loss) $36,000 $39,250 $(24,270) $50,980 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, 2048 Continue Rug Yarn (Alternative 1) Discontinue Rug Yarn (Alternative 2) Differential Effects (Alternative 2) Revenues Costs: Variable Fixed Profit (loss) Feedback Check My Work Determine revenues and costs under the two scenarios: Alternative 1, in which WoolCorp continues to produce and sell rug yarn, and Alternative 2, in och WoolCorp no longer produces rug yarn. Which costs will remain under either alternative? What is the differential profit (loss)? Review Exhibit 4 in the text. 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. 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 Impact on regular prices Sell or Special Price Continue or Not Process Further Order Make or Buy Discontinue Production Bottleneck Important No Yes No No No No No Contribution margin per bottleneck hour No No No No No Yes No Check My Work 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. 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 Special Price Continue or Not Process Further Order Make or Buy Discontinue Production Bottleneck Important Impact on regular prices No No Yes No No No No Contribution margin per bottleneck hour No No No No No Yes No Differential revenue is more than diffe ntial cost Yes Yes Yes No Yes No No Supplier price is less than WoolCorp's variable cost per unit No No No Yes No No No Sunk costs No No No No No No Yes Robinson-Patman Act No No Yes No No No No Feedback Check My Work 1. Which alternative is the most financially advantageous for WoolCorp? 2. Review the criteria for each type of decision. Feedback Check My Work Partially correct