Question

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 $210,000 $155,000 $167,000 Total Company $532,000 Sales Costs of goods sold: Variable costs Fixed costs $(48,000) (32,000) $(80,000) $130,000 $(103,780) (69,200) $(18,600) (12,400) $(31,000) $124,000 $(37,180) (24,800) $(61,980) Total cost of goods sold Gross profit $(172,980) $359,020 $105,020 Operating expenses: Variable expenses Fixed expenses $(5,000) (89,000) $(94,000) $36,000 $(7,750) (78,000) $(85,750) $38,250 $(53,120) (106,200) $(159,320) $(54,300) $(65,870) (273,200) $(339,070) $19,950 Total operating expenses Operating income (loss) 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.

Answer 1

Solution:

Differential Analysis Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn (Alternative 2) December 31, 2048 Continue Rug Yarn Discontinue Rug Differential Effects (Alternative 1) Yarn (Alternative 2) (Alternative 2) (A) (C = B - A) Revenues $ 1,67,000 $ -1,67,000 Costs: Variable -90,300 90,300 Fixed -1,31,000 -1,31,000 Profit (Loss) -54,300 $ -1,31,000 $ 76,700 Product Rug Yarn should be continued because the income genarated from the product will cover some of fixed costs.