Austin Wool Products purchases raw wool and processes it into spindles of yarn. The spindles of yarn can then be sold directly to stores or the can be used by Austin Wool Products to make afgans. Each spindle of yarn sells for $12; variable costs are $8 to make a spindle of yarn, and fixed costs to make the spindles of yarn total $8,000.
Each afghan sells for $32 and requires and a quarter (1.25) spindles of yarn. Excluding the cost of yarn, variable costs to make an aghan from spindles of yarn is $9, and fixed costs to make afghans from spindles of yarn $20,000. Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.
A. What is the total cost per unit to make an afghan?
B. In order to maximize profits, should Austin sell spindles of yarn or further process the yarn into afghans? How much operating income would Austin generate on a monthly basis following your suggestion?
C. What is the lowest selling price Austin should be willing to accept for one afghan as long as they can sell spindles of yarn to the outside market for $12 each?