Question

A company has a process that results in 37000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $247900 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action?

Process further, the company will be better off by $25900.

Sell now, the company will be better off by $247900.

Sell now, the company will be better off by $25900.

Process further, the company will be better off by $222000.

Answer 1

Number of pounds of Product A = 37,000

Selling price per unit of product A = $8

Sales revenue from product A = Number of pounds of Product A x Selling price per unit of product

= 37,000 x 8

= $296,000

Selling price per unit after furniture processing = $14

Sales revenue after further processing = Number of pounds of Product A x Selling price per unit after furniture processing

= 37,000 x 14

= $518,000

Incremental sale revenue = Sales revenue after further processing - Sales revenue from product A

= 518,000-296,000

= $222,000

Further processing costs = $247,900

Incremental income = Incremental sale revenue- Further processing costs

= 222,000-247,900

= -$25,900

Sell now, the company will be better off by $25900.

Third option is correct.

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