Austin Wool Products Purchases Raw Wool and Processes It into Yarn

question 19

Multiple Choice

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: $\begin{array}{l}\begin{array} { | l | r | } \hline \text { Data for one spindle of yarn: } & \\\hline \text { Selling price } & \$ 12 \\\hline \text { Variable Production Cost } & \$ 8 \\\hline \text { Fixed Production Cost (based on 4,000 spindles of yarn produced) } & \$ 2 \\\hline\end{array}\\\\\\\begin{array} { | l | r | } \hline \text { Data for one afghan: } & \\\hline \text { Selling Price } & \$ 32 \\\hline \text { Production Cost per Spindle of Yarn } & \$ 10 \\\hline \text { Variable Production cost to process the yarn into an Afghan } & \$ 9 \\\hline \begin{array} { l } \text { Avoidable Fixed Production Cost to Process the Yarn into an Afghan (based } \\\text { on } 4,000 \text { afghans produced) }\end{array} & \$ 5 \\\hline\end{array}\end{array}$ 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,what will be the change in the monthly net operating income as compared to selling 4,000 spindles of yarn?

• A) $16,000 increase.
• B) $16,000 decrease.
• C) $24,000 increase.
• D) $24,000 decrease.

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