The Sweater Company produces sweaters. The company buys raw woolon the market and processes it into wool yarn from which thesweaters are woven. One spindle of wool yarn is required to produceone sweater. The costs and revenues associated with the sweatersare given below:
Per Sweater
Sellingprice P30.00 |
Cost to manufacture: |
Raw materials: |
Buttons, threads,lining P 2.00 |
Woolyarn 16.00 |
Total rawmaterials 18.00 |
Directlabor 5.80 |
Manufacturingoverhead 8.70 32,50 |
Manufacturing profit(loss) P(2,50) |
Originally, all of the wool yard was used to produce sweaters,but in recent years a market has developed for the wool yarnitself. The yarn is purchased by other companies for use inproduction of wool blankets and other wool products. Since thedevelopment of the market for the wool yarn, a continuing disputehas existed in the Sweater Company as to whether the yarn should besold simply as yarn or processed into sweaters. Current cost andrevenue data on the yarn are given below:
Per Spindle
Sellingprice P20.00 |
Cost to manufacture: |
Raw materials (rawwool) P7.00 |
Directlabor 3.60 |
Manufacturingoverhead 5.40 16.00 |
Manufacturingprofit P4.00 |
The market for sweaters is temporarily depressed, due tounusually warm weather. This has made it necessary for the companyto discount the selling price of the sweaters to P30 from thenormal P40 price. Since the market for wool yarn has remainedstrong, the dispute has again surfaced over whether the yarn shouldbe sold outright rather than processed into sweaters. The salesmanager thinks that the production of sweaters should bediscontinued; she is upset about having to sell sweaters at a P2,50loss when the yarn could be sold for a P4.00 profit. However, theproduction superintendent is equally upset at the suggestion thathe close down a large portion of the factory, He argues that thecompany is in the sweater business, not the yarn business, and thatthe company should focus on its core strength.
Due to the nature of the production process, virtually all ofthe manufacturing overhead costs are fixed and would not beaffected even if sweaters were discontinued. Manufacturing overheadis assigned to products on the basis of 150% of direct laborcost.
Would you recommend that the wool yearn be sold outright orprocessed into sweaters?
a. Sold outright because profit would decrease by P2.50 persweater
b. Processed into sweaters because profit would increase byP6.20 per sweater
c. Processed further because profit would increase by P0.80 persweater
d. Processed into sweaters because profit would increase byP2.20 per sweater
How much fixed overhead per unit is relevant to the productionof sweaters?
a. P5.40
b. P8.70
c. P14.10
d. P0
