The Scottie Sweater Company produces sweaters under the \"Scottie\" label. The c

Question

The Scottie Sweater Company produces sweaters under the "Scottie" label. The company buys raw wool and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one sweater. The costs and revenues associated with the sweaters are given below: Per Sweater S 31.00 Selling price Cost to manufacture: Raw materials: $2.00 14.00 16.00 7.60 11.40 Buttons, thread, lining Wool yarn Total raw materials Direct labor Manufacturing overhead Manufacturing profit (loss) 35.00 S (4.00) Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. The yarn 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 yarn, a continuing dispute has existed in the Scottie Sweater Company as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below: Per Spindle of Yarn Selling price Cost to manufacture: S 18.00 Raw materials (raw wool) Direct labor Manufacturing overhead $8.00 3.60 2.40 14.00 S 4.00 Manufacturing profit

Explanation / Answer

Answer for 1 a)

Unit contribution that sweater yeilds:

Answer for 1b)

Yarn must be further processed into Sweater as it is yeilding $17.4 contribution and $6($17.4-$11.4) profit at usual price.

Answer for 2)

The lowest price that is acceptable is $35 as below that amount it will lead to loss.

Particulars $ $ Selling price(normally) 41 (Less)total cost of raw materials (16) (Less)Direct labour (7.6) (23.6) Unit contribution margin 17.4

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