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 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.
-If Austin chooses to produce 4,000 afghans each month,the change in the monthly net operating income as compared to selling 4,000 spindles of yarn is:
A)$24,000 decrease
B)$24,000 increase
C)$16,000 decrease
D)$16,000 increase

Question

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 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.
-If Austin chooses to produce 4,000 afghans each month,the change in the monthly net operating income as compared to selling 4,000 spindles of yarn is:
A)$24,000 decrease 
B)$24,000 increase 
C)$16,000 decrease 
D)$16,000 increase

Quizplus · Accepted Answer

If Austin chooses to produce 4,000 afghans, they would sell for $32 each and require $20 of direct materials and $14 of direct labor per unit. This means the contribution margin per unit would be $32 - $20 - $14 = $8.

Thus, the total contribution margin for producing 4,000 afghans would be:
$8/unit × 4,000 units = $32,000

If Austin chooses to sell 4,000 spindles of yarn, the total contribution margin would be:
$4/unit × 4,000 units = $16,000

Therefore, the change in the monthly net operating income as compared to selling 4,000 spindles of yarn would be:
$32,000 - $16,000 = $16,000 increase.

Austin Wool Products Purchases Raw Wool and Processes It into Yarn