Sell or Carry on

NotesObjective Test

The further processing decision

occurs when there is a choice between selling a product now or processing it further.

An Example:

A Company manufactures two joint products, A and B. 

Output per batch is 10 units of A and 15 units of B.

The sales value of A at split-off point is $80 per unit.

An opportunity exists to process product A further, at an extra cost of $500 per batch, to produce product C. 

One unit of joint product A is sufficient to make one unit of C which has a sales value of $150 per unit.

Solution

Sales value of C (10 units x $150) = 1,500
Sales value of A (10 units x $80)  = 800
Incremental revenue from further processing = 1,500 - 800 = 700
Further processing cost = $500
Benefit from further processing in order to sell C = 700 - 500 = $200 per batch

NotesObjective Test