Spinning Wool Currently Produces and Sells Three Different Types of Yarn

Essay

Spinning Wool currently produces and sells three different types of yarn. Total demand for the yarn exceeds the firm's capacity. The constraint on production is the time available on a special machine that cleans the wool used for the yarn. Data on the products and time required on the special machine are summarized in the following chart:
Type of Yarn
Fine Medium Coarse
Selling price $24 $30 $36
Variable manufacturing cost $12 $18 $11
Variable marketing cost $2 $2 $6
Fixed cost per lot $5 $8 $10
Machine hours needed per lot 0.2 0.25 0.5
Maximum demand (in lots)per period 4,000 3,750 5,000
The firm has only 2,500 hours of time available on the special machine per period. Fixed costs are $100,000 per period, which will not change if the product mix changes or if any products are dropped.
a)Which product should Spinning Wool emphasize? Show your calculations.
b)Up to how much per hour should Spinning Wool be willing to pay to increase capacity on the special machine?
c)Describe two reasons why the managers cannot be certain that they have accurately estimated the product selling prices.
d)Describe two reasons why the managers cannot be certain that they have accurately estimated the product variable costs.
e)Discuss how the uncertainties in parts (c)and (d)are likely to affect the managers' product emphasis decisions at Spinning Wool.