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Chino Company manufactures fabric and clothing. Managers can either sell the unfinished fabric to other clothing manufacturers or incur additional conversion costs to create a finished garment. The costs incurred to produce the unfinished fabric are $400,000, which are allocated to the products based on the sales value of the unfinished fabric. Following is information concerning the clothing that can be produced from the fabric:


Product # of units Selling price of Unfinished Fabric Selling price after processing further Addtional Processing cost
Pants 6,000 $20.00 $30.00 $28,450
Shirts 12,000 $23.20 $32.40 $64,400
Coats 4,000 $38.80 $43.20 $18,300

Required:
a. Calculate the increase or decrease in profit if the products are processed further.
b. Assume that the $400,000 in costs is allocated based on the number of units of output. Which products should be sold as unfinished fabric and which should be further processed?

Respuesta :

Answer:

a. we have:

Increase in profit of Pants if processed further = $31,550

Increase in profit of Shirts if processed further = $46,000

Decrease in profit of Coats if processed further = -$700

b. We have:

1. Both Pants and Shirts should be processed further.

2. Coats should should be sold as unfinished fabric.

Explanation:

a. Calculate the increase or decrease in profit if the products are processed further.

Note: See the part (a) of the attached excel file for calculation of the increase or decrease in profit if the products are processed further.

In the attached excel file, we have:

Increase in profit of Pants if processed further = $31,550

Increase in profit of Shirts if processed further = $46,000

Decrease in profit of Coats if processed further = -$700

b. Assume that the $400,000 in costs is allocated based on the number of units of output. Which products should be sold as unfinished fabric and which should be further processed?

Note: See the part (b) of the attached excel file for calculation of the increase or decrease in profit if the products are processed further.

In the attached excel file, we have:

Increase in profit of Pants if processed further = $31,550

Increase in profit of Shirts if processed further = $46,000

Decrease in profit of Coats if processed further = -$700

Since both there are increases in the profits of both Pants and Shirts if they are processed further, this implies that both Pants and Shirts should be processed further.

Since there is a decrease in the profits of Coats if it is processed further, this implies that Coats should should be sold as unfinished fabric.

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