CASE 12-29 Sell or Process Further Decision LO12-7
The Scottie Sweater Company produces sweaters under the “Scottie” label. The company buys raw wool and processes it into wool yam from which the sweaters are woven. One spindle of wool yam is required, to produce one sweater. The costs and revenues associated with the sweaters are given below:
Per Sweater
Originally, all of the wool yam was used to produce sweaters, but in recent years a market has developed for the wool yam itself. The yam is purchased by other companies for use in production of wool blankets and other wool products. Since the development of the market for the wool yam, a continuing dispute has existed in the Scottie Sweater Company as to whether the yam should be sold simply as yam or processed into sweaters. Current cost and revenue data on the yam are given below:
The market for sweaters is temporarily depressed, due to unusually warm weather in the western states where the sweaters are sold. This has made it necessary for the company to discount the selling price of the sweaters to $30 from the normal $40 price. Since the market for wool yam has remained strong, the dispute has again surfaced over whether the yam should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued: she is upset about having to sell sweaters at a $2.50 loss when the yam could be sold for a $4.00 profit. However, the production superintendent does not want to close down a large portion of the factory. He argues that the company is in the sweater business, not the yam business, and the company should focus on its core strength.
Required:
All of the
- What is the facial advantage (disadvantage) of further processing one spindle of wool yam into a sweater?
- Would you recommend that the wool yam he sold outright or processed into sweaters? Explain.
- What is the lowest price that the company should accept for a sweater? Support your answer will appropriate computations and explain your reasoning.
Want to see the full answer?
Check out a sample textbook solutionChapter 12 Solutions
MANAGERIAL ACCOUNTING
- CH. 4 Question 5 A company is considering outsourcing production of one of its products. The company has received a bid from another company to produce 10,000 units per year for $16 each. The following information: Direct Materials $9 Direct Labor $4 Variable Manfuacturing OH $2 Fixed Manufacturing OH $3 Total Cost per unit $18 1) Compute the difference in cost between making and buying the product 2) Should the company buy the product from the other company or continue to make it themselves?arrow_forwardExercise 13-5 (Algo) Volume Trade-Off Decisions [LO13-5] Outdoor Luggage, Incorporated, makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below. Ski Guard Golf Guard Fishing Guard Selling price per unit $ 210 $ 310 $ 265 Variable cost per unit $ 70 $ 150 $ 130 Plastic injection molding machine processing time required to produce one unit 8 minutes 10 minutes 10 minutes Pounds of plastic pellets per unit 7 pounds 16 pounds 6 pounds Required: 1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product? 2. Which product offers the most profitable use of the plastic injection molding machine? 3. If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new…arrow_forwardMake versus Buy; Continuation of Exercise 9-22 (Chapter 9) Vista Company manufactureselectronic equipment. In 2018, it purchased from an outside supplier the special switches used ineach of its products. The supplier charged Vista $2 per switch. As an alternative, Vista’s CEO considered purchasing either machine A or machine B so the company could manufacture its own switches.The CEO decided at the beginning of 2019 to purchase machine A, based on the following data:[LO 11-2][LO 11-3]Machine A Machine BAnnual fixed cost (depreciation) $135,000 $204,000Variable cost per switch 0.65 0.30Required1. Assume that machine A has not yet been purchased. What is the annual volume (rounded up to nearest whole number) that would make the company indifferent between the two decision alternatives(i.e., purchasing and then using machine A to make the switches versus purchasing the switches fromthe outside vendor)? 2. Assume that machine A has already been purchased. Is it preferable to use machine A…arrow_forward
- Ch. 7 Incremental Analysis Pg 461 Self Practice Please solve the following questions and provide and explanation. Thank you "Big Tent Company has received a special order for 10,000 units at a discount price of $100 each. The product sells for $150, has the following manufacturing costs: " Cost Per Unit Direct Materials $40 Direct Labor $ 20 Variable Manufacturing Overhead $ 20 Fixed Manufacturing Overhead $30 Totaul Unit Cost $110 1) Assume Big Top has enough extra capacity to fill the order without affecting the production or sale of it's product to regular customers. If Big Top accepts offer, what effect will the roder have on the company's short-term profit? 2) If Big Top is at full capacity, what price would be needed to cover all incremental costs, including opportunity costs?arrow_forwardQS 23-6 Make or buy LO P1 Kando Company incurs a $9 per unit cost for Product A, which it currently manufactures and sells for $13.50 per unit. Instead of manufacturing and selling this product, the company can purchase it for $5 per unit and sell it for $12 per unit. If it does so, unit sales would remain unchanged and $5 of the $9 per unit costs of Product A would be eliminated. 1. Prepare Incremental cost analysis. Should the company continue to manufacture Product A or purchase it for resale? (Round your answers to 2 decimal places.)arrow_forwardMake-or-Buy Decision (LO2) Switzer Corporation makes motorcycle engines. The company’s records show the following units costs to manufacture part #61645: Another manufacturer has offered to supply Switzer Corporation with part #61645 for the costs of $50 per-unit. Switzer uses 1,000 units annually.arrow_forward
- H6. 18. Question Content Area Aquamarine Company sells one of its products, Product X, for $50 each. Sales volume averages 5,000 units per year. Recently, its main competitor reduced the price of its product to $30. Aquamarine expects sales to drop dramatically unless it matches the price offered by its competitor. In addition, the current profit per unit must be maintained. Information about Product X (for production of 5,000 units) follows: Standard QuantityActual QuantityActual CostMaterials (pounds)8,50010,00025,000Labor (hours)2,0002,50012,000Setups (hours)02,0004,000Material handling (moves)01,0002,500Warranties (number repaired)05008,000 The non-value-added cost per unit is (Round answer to two decimal places.): a. $3.17. b. $4.50. c. $4.13. d. $3.80. 24. Question Content Area Phillips Screw Company produces screw fittings. It is determined that T = 1 inch in diameter. Specification limits allow a variation of plus or minus 0.5 inches. Products produced at…arrow_forwardExercise 13-13 (Algo) Sell or Process Further Decision [LO13-7] Wexpro, Incorporated, produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $69,000 per ton, one-fourth of which is allocated to product X15. Seven thousand five hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $12 each, or processed further at a total cost of $9,200 and then sold for $18 each. Required: 1. What is the financial advantage (disadvantage) of further processing product X15? 2. Should product X15 be processed further or sold at the split-off point?arrow_forward
- Financial & Managerial AccountingAccountingISBN:9781337119207Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningAccounting (Text Only)AccountingISBN:9781285743615Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning