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 3

Wool Inc. also sells wool so that crafters can use their signature wool to create their own

products at home. Wool Inc. produces three joint products from raw wool. At the split-off

point, three basic products emerge: red wool, blue wool, and yellow wool. Each of these

products can be either sold at the split-off point or processed further. If they are processed

further, the resulting products can be sold to high-end crafters as a premium product. Cost and

revenue information is as follows.

Sales Value and Additional

Costs If Processed Further

Pounds Sales Value at Final Sales Additional Further

Produced Split-Off Value Processing Cost

Red Wool 10,000 $110,000 $200,000 $50,000

Blue Wool 5,000 100,000 180,000 60,000

Yellow Wool 3,000 90,000 110,000 21,000

Required:

a. Which products should Wool Inc. process beyond the split-off point?

b. At what price per pound would it be advantageous for Wool Inc. to sell blue wool at

the split-off point rather than process it further?