Question

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 Number of Units Selling Price of Unfinished Fabric Selling Price after Processing Further Additional 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: 2-a. Calculate the increase or decrease in profit if the products are processed further. 2-b. Which products should be sold as unfinished fabric and which should be further processed

Answer 1

a. increase in profits = $170,400 - $92,850 = $77,550 if only pants and shirts are processed further

if all products are processed further, profits = $188,000 - $111,150 = $76,850

b. pants and shirts should be processed further

Step-by-step explanation:

Product Number Selling Price of Selling Price Additional

of units unfinished fabric after Proc. F. 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

Additional revenue per unit

Pants $10 x 6,000 = $60,000 ≥ $28,450

Shirts $9.20 x 12,000 = $110,400 ≥ $64,400

Coats $4.40 x 4,000 = $17,600 ≤ $18,300