When I find them, I buy pure wool sweaters and put them in a very hot water wash, then dry on hot. They usually shrink madly, and then can be cut up. Last one I think I made mittens with them to go over gloves for packing in the snowy mountains. Just an outline of mittens and elastic in the folded over long wrist band.
Never tried them in applique, but if they won't shrink any more or bleed dye, then why not? In fact, I have a very old, very nice long cashmere coat that is, or was lovely in its day, but it's not good enough, quite, to wear now, but too nice to throw away, and in donating it to Sally Ann they would probably toss it or sell it to some other country. So I'm thinking of felting it myself, after removing the lining. I'll have to watch this site to discover what kind of applique to make of it, besides tree trunks and limbs, and wooden buildings, etc.