Mastery Problem: Differential Analysis and Product Pricing

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

income statement. Then scroll down to complete the differential analysis.

WoolCorp

Condensed Income Statement

For the Year Ended December $31,20Y8$

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 $31,20Y8$

Revenues :

Costs:

Variable

Fixed

Profit $($loss$)$Print Item

Question Content Area

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.

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 $31,20$Y$8$

Raw Wool Wool Yarn Rug Yarn Total Company

Sales $$200,000$ $$155,000$ $$187,000$ $$542,000$

Costs of goods sold:

Variable costs $$(48,000)$ $$(18,600)$ $$(37,160)$ $$(103,760)$

Fixed costs $(32,000)(12,400)(24,800)(69,200)$

Total cost of goods sold $$(80,000)$ $$(31,000)$ $$(61,960)$ $$(172,960)$

Gross profit $$120,000$ $$124,000$ $$125,040$ $$369,040$

Operating expenses:

Variable expenses $$(5,000)$ $$(7,750)$ $$(53,110)$ $$(65,860)$

Fixed expenses $(89,000)(77,500)(106,200)(272,700)$

Total operating expenses $$(94,000)$ $$(85,250)$ $$(159,310)$ $$(338,560)$

Operating income $($loss$)$ $$26,000$ $$38,750$ $$(34,270)$ $$30,480$

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 $31,20$Y$8$

Continue Rug Yarn $($Alternative $1)$ Discontinue Rug Yarn $($Alternative $2)$ Differential Effects $($Alternative $2)$

Revenues $fill in the blank f$0059$a$000$feaf$8$a$\_1$

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Costs:

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Fixed fill in the blank f$0059$a$000$feaf$8$a$\_7$

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Profit $($loss$)$ $fill in the blank f$0059$a$000$feaf$8$a$\_10$

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