WoolCo buys sheep’s wool from farmers. The company beganoperations in January of this year, and is making decisions onproduct offerings, pricing, and vendors. The company is alsoexamining its method of assigning overhead to products. You’ve justbeen hired as a production manager at WoolCo.

Currently WoolCo makes three products: (1) raw, clean wool to beused as stuffing or insulation; (2) wool yarn for use in thetextile industry, and (3) extra-thick yarn for use in rugs.

The company would like you to evaluate its costing methods forits raw wool and wool yarn. Upper management would also like yourrecommendations regarding a production decision regarding theircurrent and proposed product lines.

Traditional costing allocates overhead costs to products basedupon a predetermined factory overhead rate, which is computed usingan estimated activity base such as direct labor hours or machinehours. The rate is computed as follows:

Predetermined Factory Overhead Rate = (Estimated Total FactoryOverhead Costs) ÷ (Estimated Activity Base)

WoolCo has been using traditional costing with combing machinehours as the activity base. The company would like to consideractivity-based costing. In order to understand their current systembetter, you evaluate WoolCo’s current method of costing for rawwool and wool yarn. The production staff has compiled the followinginformation for you on the production of 500 pounds of either rawwool or wool yarn:

Total Factory	Total Costs
Overhead Costs
Sorting	$25,600
Cleaning	38,400
Combing	1,300

	Raw Wool	Wool Yarn
Hours of combing machine use required	80	20

In the following table, use combing machine hours as theactivity base for assigning overhead costs to each product. Whenrequired, round your answers to the nearest dollar.

Predetermined factory overhead rate:  per direct laborhour

Points:

0 / 1

	Raw Wool	Wool Yarn
Allocated factory overhead cost		In order to compare WoolCo’s current traditional method withactivity-based costing, you interview the production staff andcompile the following information, which relates only to the costsfor raw wool and wool yarn. WoolCo wishes to consider costing onlyfor these two products at this time, since they are moreestablished and have more data to evaluate. Type of Cost Activity Base Total Cost Sorting Hours of sorting $25,600 Cleaning Units of cleaning machine power $38,400 Combing Hours of combing machine use $1,300 Raw Wool Wool Yarn Hours of sorting required 1,200 2,800 Units of cleaning machine power required 1,800 4,200 Hours of combing machine use required 80 20 In the following table, compute and enter the activity rate foreach of the three activities. If required, round your answers tothe nearest cent. Activity Activity Rate Sorting per sorting hour Cleaning per unit of cleaning machine power Combing per hour of combing machine use Points: 3 / 3 In the following table, allocate the costs of sorting, cleaning,and combing based on the rates of activity consumed by eachproduct’s process. When required, round your answers to the nearestdollar. Raw Wool Wool Yarn Sorting cost $ $ Cleaning cost Combing cost Total cost $ $ For the past year, WoolCo has experimented with its thirdproduct, extra-thick rug yarn. The company wishes to considerwhether to continue or discontinue manufacturing and selling thisproduct. You decide to prepare a differential analysis of theincome related to all three products. To begin your analysis, youreview the following Condensed Income Statement. Then scroll downto complete the differential analysis. WoolCo Condensed Income Statement For the Year Ended December 31 1 Raw Wool Wool Yarn Rug Yarn Total Company 2 Sales $200,000.00 $155,000.00 $167,000.00 $522,000.00 3 Cost of goods sold: 4 Variable costs $48,000.00 $18,600.00 $37,160.00 $103,760.00 5 Fixed costs 32,000.00 12,400.00 24,780.00 69,180.00 6 Total cost of goods sold $80,000.00 $31,000.00 $61,940.00 $172,940.00 7 Gross profit $120,000.00 $124,000.00 $105,060.00 $349,060.00 8 Operating expenses: 9 Variable expenses $5,000.00 $7,750.00 $53,130.00 $65,880.00 10 Fixed expenses 89,000.00 77,500.00 106,200.00 272,700.00 11 Total operating expenses $94,000.00 $85,250.00 $159,330.00 $338,580.00 12 Income (loss) from operations $26,000.00 $38,750.00 $(54,270.00) $10,480.00 Complete the table using the data in the income statementspreviously shown to compare the effects of dropping the rug yarnline of products. For those boxes in which you must entersubtracted or negative numbers use a minus sign. If an amount iszero, enter “0”. Score: 24/58 Differential Analysis Continue Rug Yarn (Alternative 1) or Discontinue Rug Yarn(Alternative 2) December 31 1 Continue Rug Yarn (Alternative 1) Discontinue Rug Yarn (Alternative 2) Differential Effect on Income (Alternative 2) 2 Revenues ? 3 Costs: 4 Variable ? 5 Fixed ? 6 Total Costs 7 Income (loss) Answer the following questions (1) and (2), then fill in table(3). 1. After reviewing your work on the Traditional Costing andActivity-Based Costing panels, which costing method would yourecommend to WoolCo, and why? Activity-based costing, because it recognizes differences in howeach product uses factory overhead activities, yielding moreaccurate product costs. Traditional costing, because it is a tried-and-true method usedfor the entire life of the company. The company should use whichever method is the cheapest toimplement. Since both the methods give the same costs for each product,there is no advantage to either method. Points: 0 / 1 Feedback Check My Work Review the data you’ve compiled, and think about which methodwould provide more accurate product costs. 2. After reviewing your work on the Continue/Discontinue panel,should WoolCo continue (Alternative 1) or discontinue (Alternative2) the rug yarn product line? Discontinue (Alternative 2) Continue (Alternative 1) The company is indifferent between Alternative 1 and Alternative2 Points: 0 / 1 Feedback Check My Work Which alternative is the most financially advantageous forWoolCo? 3. The following table shows several business decisions thatmight need to be made across the top row. Along the left-handcolumn, there are important factors to consider. Choose the factor(s) that are important to the decision. Checkall that apply. If the factor is not important to any of thedecisions, check the “Not Important” box. Lease or Sell Sell or Process Further Special Price Order Make or Buy Continue or Discontinue Production Bottleneck Not Important Impact on regular prices Contribution margin per bottleneck hour Differential revenue is more than differentialcosts Supplier price is less than WoolCo’s variable costper unit Sunk costs Robinson-Patman Act