Assignment Question: 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:
Selling price per sweater $30.00
Cost per sweater to manufacture:
Raw materials: Wool yarn $16.00
Buttons, thread, lining 2.00
Total raw materials 18.00
Direct labour 5.80
Manufacturing overhead 8.70
Manufacturing profit (loss) $(2.50)
Originally, all of the wool yarn was used to produce sweaters, but in recent years a market has developed for the wool yarn itself. Current cost and revenue data on the yarn are given below:
Selling price per spindle of yarn $20.00
Cost to manufacture:
Raw materials (raw wool) $7.00
Direct labour 3.60
Manufacturing overhead 5.40
Manufacturing profit $4.00
All of the manufacturing overhead costs are fixed and would not be affected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labour cost. Materials and direct labour costs are variable.
Required:
1. What is the incremental contribution margin (if any) from further processing the wool into sweaters?
2. What is the lowest price that the company should accept for a sweater? Explain.
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