Question

Exercise 12-13 Sell or Process Further Decision [LO12-7]

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $60,000 per ton, one-fourth of which is allocated to product X15. Seven thousand units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $9 each, or processed further at a total cost of $9,500 and then sold for $12 each.

Required:

1. What is the financial advantage (disadvantage) of further processing product X15?

2. Should product X15 be processed further or sold at the split-off point?

Answer 1

processing cost of X 15 [60000/4]=15000$ is not relevant in decision making here because it will occur in both the situation.(sell at split off / further process]

	if sold at split off	if further processed	financial advantage(disadvantage)
sales	63000$[7000*$9]	84000[$12*7000units]	21000
cost of further processing	0	($9500)	(9500)
		Net	11500$

financial advantage = 11500$

yes it should be further processed as it increases the profit by $11500