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 produced and sold 4,000 afghans and zero spindles of yarn the total contribution margin would be closed to:
A) $24,000.
B) $40,000.
C) $60,000.
D) $8,000.

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 produced and sold 4,000 afghans and zero spindles of yarn the total contribution margin would be closed to:
A) $24,000. 
B) $40,000. 
C) $60,000. 
D) $8,000.

Quizplus · Accepted Answer

If Austin produces and sells 4,000 afghans, the total contribution margin would be $60,000.

The contribution margin per afghan can be calculated as follows:

Selling price per afghan = $110 
Variable cost per afghan = $70 (the cost of one spindle of yarn) 
Contribution margin per afghan = $110 - $70 = $40

Total contribution margin for 4,000 afghans = $40 x 4,000 = $160,000

However, if Austin sells all 4,000 spindles of yarn instead of using them to make afghans, the contribution margin would be:

Selling price per spindle of yarn = $30 
Variable cost per spindle of yarn = $20 
Contribution margin per spindle of yarn = $30 - $20 = $10

Total contribution margin for 4,000 spindles of yarn = $10 x 4,000 = $40,000

Since the contribution margin for selling only afghans is higher than the contribution margin for selling only spindles of yarn, producing and selling 4,000 afghans would be the best choice for Austin.

Austin Wool Products Purchases Raw Wool and Processes It into Yarn