(9) Austin Wool Products purchases raw wool and processes it into yarn. The spin

Question

(9) Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows:

Each month 3,300 spindles of yarn are produced that can either be sold outright or processed into afghans.

What is the lowest price Austin should be willing to accept for one afghan as long as it can sell spindles of yarn to the outside market for $16 each?

(9) Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows:

Explanation / Answer

Hi,

Please find the answer as follows:

Market Value of a Spindle of Yarn = 16

Add Variable production cost to process the yarn into an afghan = 17

Add Avoidable fixed production cost to process the yarn into an afghan = 13

Lowest price Austin should be willing to accept = 16 + 17 + 13 = 46

Option B is correct.

Thanks.

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