Question

The firm CANDLEWICK, INC. produces CANDLES as well as an essential input for that product: CANDLE...

The firm CANDLEWICK, INC. produces CANDLES as well as an essential input for that product: CANDLE WAX. The input can be sold for a total of $25,000 revenue. CANDLES can be sold for a total revenue of $60,000.

Processing CANDLE WAX further requires machinery and labor. The machinery is leased for $9,000 per month and salaries for the laborer is $15,000 per month. Also about $1,000 of other costs per month are incurred in further processing.

Selling the input, CANDLE WAX, works better for CANDLEWICK, INC.'s distributors, which already have an overabundance of suppliers for CANDLES.

Which of the following is TRUE?
Answers: a.

Relevant cost analysis recommends the firm sell the input as is. Strategic cost analysis recommends the firm process further.
b.

Relevant cost analysis and strategic cost analysis both recommend the firm process further.
c.

Relevant cost analysis recommends the firm process further. Strategic cost analysis recommends the firm sell the input at is.
d.

Relevant cost analysis and strategic cost analysis both recommend the firm sell the input as is.
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Homework Answers

Answer #1

Selling price of input Candle Wax = $25,000

Selling price of candle = $60,000

Hence, increase in revenue by selling candle = 60,000 - 25,000

= $35,000

Further processing costs required to make candle from candle wax = Lease cost + Salaries + Other costs

= 9,000 + 15,000 + 1,000

= $25,000

Hence, increase in profits by selling candle = Increased revenue - Increased cost

= 35,000 - 25,000

= $10,000

Hence, further processing is justified in terms of increased profits.

Hence, correct option is (b) i.e. Relevant cost analysis and strategic cost analysis both recommend the firm process further.

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