Answered: 4,000 spindles of yarn are produced.…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 8E

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4,000 spindles of yarn are produced. The spindles of yarn can then be sold directly to stores or
they can be used by Austin Wool Products to make afghans. Each spindle of yarn sells for $12;
variable costs are $8 to make a spindle of yarn, and fixed costs to make 4,000 spindles of yarn
total $8,000.

The yarn can also be used to make afghans. Each afghan sells for $32 and requires one and a
quarter (1.25) spindles of yarn. The additional costs incurred to make afghans from yarn include
$9 per afghan in variable costs, and $20,000 in additional fixed costs.

a. In order to maximize profits, should Austin sell the spindles of yarn or further process the
yarn into afghans? How much operating income would Austin generate on a monthly
basis by following your suggestion?

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