The Seweeather Co. produces sweaters. The company buys raw wool on the market and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one sweater. The costs and revenues associated with the sweaters are given below:

Per sweater

Selling price $30.00

Cost to manufacture:

Raw materials:

Buttons, threads, lining$ 2.00

Wool yarn 16.00

Total raw materials 18.00

Direct labor 5.80

Manufacturing overhead8.7032,50

Manufacturing profit (loss)$(2,50)

Originally, all of the wool yard was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. The yarn is purchased by other companies for use in production of wool blankets and other wool products. Since the development of the market for the wool yarn, a continuing dispute has existed in the Seweeather Co. as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below:

Per Spindle

Selling price $20.00

Cost to manufacture:

Raw materials (raw wool) $7.00

Direct labor 3.60

Manufacturing overhead 5.40 16.00

Manufacturing profit $4.00

The market for sweaters is temporarily depressed, due to unusually warm weather. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yarn has remained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued; she is upset about having to sell sweaters at a $2,50 loss when the yarn could be sold for a $4.00 profit. However, the production superintendent is equally upset at the suggestion that he close down a large portion of the factory, He argues that the company is in the sweater business, not the yarn business, and that the company should focus on its core strength.

Due to the nature of the production process, virtually all of the manufacturing overhead costs are fixed and would not be affected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labor cost.

A. Would you recommend that the wool yearn be sold outright or processed into sweaters?

a. Processed into sweaters because profit would increase by $6.20 per sweater

b. Processed further because profit would increase by $0.80 per sweater

c. Processed into sweaters because profit would increase by $2.20 per sweater

d. Sold outright because profit would decrease by $2.50 per sweater

B. How much fixed overhead per unit is relevant to the production of sweaters?

a. $5.40

b. $0

c. $8.70

d. $14.10

C.What is the lowest price that the company should accept for a sweater?

a. $32.50

b. $29.50

c. $27.80

d. $23.80

Answer with solution and explanation please.