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Wool Incorporated Wool Incorporated manufactures clothing from wool. Planning for next year, Wool Inc. has consulted you to provide your recommendation on various business decisions. Use your knowledge of relevant costs for decision making to provide a recommendation for each of the 4 business decisions. Decision 1 For the coming year, the company has scheduled production of 50,000 wool scarves. Budgeted costs for this product are as follows. Unit Costs Total (50,000 units) Variable manufacturing costs $40 $2,000,000 Variable selling expenses 750,000 Fixed manufacturing costs 600,000 Fixed operating expenses 500,000 Total costs and expenses $77 $3,850,000 The management of Wool Inc. is considering a special order from Walmart for an additional 18,000 scarves. These scarves would have smaller tassels. In all other respects, they would be identical to the regular scarves manufactured. Although Wool Inc. regularly sells its scarves to retail stores at a price of $180 each, Walmart has offered to pay only $55 per scarf, However, because no sales commissions would be involved with this special order, Wool Inc. will incur variable selling expenses of only $5 per unit on these sales, rather than the $15 it normally incurs, Accepting the order would cause no change in the company's fixed manufacturing costs or fixed operating costs. Wool Inc. has enough plant capacity to produce 70,000 scarves per year Required: 15 12 10 Required: a. Perform a quantitative analysis to determine the impact on monthly profits if Wool Inc. accepts the order. Should Wool Inc. accept the special order from Walmart? b. Briefly discuss any other factors that you believe Wool Inc.'s management should consider in deciding whether to accept the special order. Decision 2 Wool Inc. manufactures poms that it uses in several of its products. Management is considering whether to continue manufacturing the poms or to buy them from an outside source. The following information is available: The company needs 20,000 poms per year. The poms can be purchased from an outside supplier at a cost of $7.50 per unit. The unit cost of manufacturing the poms is $8.50, computed as follows. Direct materials $ 40,000 Direct labour 50,000 Factory overhead: Variable 35,000 Fixed, traceable 25,000 Fixed, common but allocated 20,000 Total manufacturing costs $170,000 Cost per unit ($170,000 + 20,000 units) $8.50 Discontinuing the manufacture of poms will eliminate all the raw materials, direct labour, and variable overhead costs but will eliminate only 80 percent of the fixed traceable factory overhead costs. The special equipment used to produce the poms has no resale value. No other reductions in fixed factory overhead will result from discontinuing the production of poms. Decision 4 Wool Inc. currently has two retail locations. Store A is located in the downtown core, while Store B is located in the local shopping mall. The most recent monthly income statement for Wool Inc. is given below: Total Sales Less variable expense Contribution margin Less traceable fixed expense Segment margin Less common fixed expense Operating Income Store A Store B $2,100,000 $1,300,000 $800,000 1,260,000 $882.000 378,000 $840,000 $418,000 $422,000 420,000 231.000 189,000 $420,000 $187,000 $233,000 350.000 210,000 140,000 $70,000 $23,000 $93.000 Wool Inc. is considering closing Store A. If Store A is closed, one-fourth of its traceable fixed expenses would continue to be incurred. Store A has also become a space where local crafters come to socialize. The closing of Store A would result in a 20% decrease in sales in Store B as the local crafters would be upset and switch to a different brand. Wool Inc. allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down Required: a. Should Wool Inc. close Store A? Show all calculations. b. The President of Wool Inc. does not understand your recommendation. Briefly support your recommendation by explaining why Store A should be kept open or shut down. Wool Incorporated Wool Incorporated manufactures clothing from wool. Planning for next year, Wool Inc. has consulted you to provide your recommendation on various business decisions. Use your knowledge of relevant costs for decision making to provide a recommendation for each of the 4 business decisions. Decision 1 For the coming year, the company has scheduled production of 50,000 wool scarves. Budgeted costs for this product are as follows. Unit Costs Total (50,000 units) Variable manufacturing costs $40 $2,000,000 Variable selling expenses 750,000 Fixed manufacturing costs 600,000 Fixed operating expenses 500,000 Total costs and expenses $77 $3,850,000 The management of Wool Inc. is considering a special order from Walmart for an additional 18,000 scarves. These scarves would have smaller tassels. In all other respects, they would be identical to the regular scarves manufactured. Although Wool Inc. regularly sells its scarves to retail stores at a price of $180 each, Walmart has offered to pay only $55 per scarf, However, because no sales commissions would be involved with this special order, Wool Inc. will incur variable selling expenses of only $5 per unit on these sales, rather than the $15 it normally incurs, Accepting the order would cause no change in the company's fixed manufacturing costs or fixed operating costs. Wool Inc. has enough plant capacity to produce 70,000 scarves per year Required: 15 12 10 Required: a. Perform a quantitative analysis to determine the impact on monthly profits if Wool Inc. accepts the order. Should Wool Inc. accept the special order from Walmart? b. Briefly discuss any other factors that you believe Wool Inc.'s management should consider in deciding whether to accept the special order. Decision 2 Wool Inc. manufactures poms that it uses in several of its products. Management is considering whether to continue manufacturing the poms or to buy them from an outside source. The following information is available: The company needs 20,000 poms per year. The poms can be purchased from an outside supplier at a cost of $7.50 per unit. The unit cost of manufacturing the poms is $8.50, computed as follows. Direct materials $ 40,000 Direct labour 50,000 Factory overhead: Variable 35,000 Fixed, traceable 25,000 Fixed, common but allocated 20,000 Total manufacturing costs $170,000 Cost per unit ($170,000 + 20,000 units) $8.50 Discontinuing the manufacture of poms will eliminate all the raw materials, direct labour, and variable overhead costs but will eliminate only 80 percent of the fixed traceable factory overhead costs. The special equipment used to produce the poms has no resale value. No other reductions in fixed factory overhead will result from discontinuing the production of poms. Decision 4 Wool Inc. currently has two retail locations. Store A is located in the downtown core, while Store B is located in the local shopping mall. The most recent monthly income statement for Wool Inc. is given below: Total Sales Less variable expense Contribution margin Less traceable fixed expense Segment margin Less common fixed expense Operating Income Store A Store B $2,100,000 $1,300,000 $800,000 1,260,000 $882.000 378,000 $840,000 $418,000 $422,000 420,000 231.000 189,000 $420,000 $187,000 $233,000 350.000 210,000 140,000 $70,000 $23,000 $93.000 Wool Inc. is considering closing Store A. If Store A is closed, one-fourth of its traceable fixed expenses would continue to be incurred. Store A has also become a space where local crafters come to socialize. The closing of Store A would result in a 20% decrease in sales in Store B as the local crafters would be upset and switch to a different brand. Wool Inc. allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down Required: a. Should Wool Inc. close Store A? Show all calculations. b. The President of Wool Inc. does not understand your recommendation. Briefly support your recommendation by explaining why Store A should be kept open or shut down