further process or sale!!! new

8/8/2019 Further Process or Sale!!! New

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³TO SELL ORTO PROCESS FURTHER ³

By-SHIVANI SAXENA(2K10MKT28)



The process of identifying the

financial data that change under alternative courses of action.

Alternative Alternative Net Income A B Increase (Decrease)Revenues $125,000 $110,000 $(15,000)Costs 100,000 80,000 20,000Net income $ 25,000 $ 30,000 $ 5,000



` Sometimes both costsand revenues vary.

` Sometimes only revenuesvary.` Sometimes only costs

vary.



` Accept an order at a specialprice.` Make or buy component parts

or finished products.` Sell products or processfurther.` Retain or replace equipment.` Eliminate an unprofitable

business segment.



Sell or Process Further?

Direct materials $ 15Direct labor 10Variable manufacturing overhead 6Fixed manufacturing overhead 4Total manufacturing costs $35

A, Inc. makes tables. The cost to manufacture

an unfinished table is $35.

Question : Should A, INC. sell the unfinished

tables or process them further?

Unfinished units sell for $50. Finished tables sell for $60 each. For a finished table direct materials anddirect labor costs will increase $2 and $4, respectively.

Variable overhead will increase by $2.40 . There willbe no increase in fixed overhead.



Sell or Process Further?P rocess Net Income

Sell Further Increase (Decrease)Sales per unit $50.00 $60.00 $10.00Cost per unit

Direct materials 15.00 17.00 (2.00)Direct labor 10.00 14.00 (4.00)Variable manufacturing overhead 6.00 8.40 (2.40)Fixed manufacturing overhead 4.00 4.00 - 0 -

Total $35.00 $43.40 $(8.40)

Net income per unit $15.00 $16.60 $ 1.60

P rocess further as long as theincremental revenue from suchprocessings exceed theIncremental processing costs.



U se Incremental Analysis to Decide .



Sell-or-process-further decision:

` Short-term, non routine decision about whether to sell a product at aparticular stage of production or to process it further in the hope of obtaining additional revenue. When two or more products are producedsimultaneously from the same input by a joint process, these productsare called joint products .

` The term joint costs is used to describe all the manufacturing costsincurred prior to the point where the joint products are identified as

individual products, referred to as the split-off point .` At the split-off point some of the joint products are in final form andsalable to the consumer, whereas others require additional processing.In many cases, the company might have the option to sell the productsat the split-off point or process them further for increased revenue.

` In connection with this type of decision, joint costs are consideredirrelevant, since the joint costs have already been incurred at the timeof the decision, and therefore are sunk cost . The decision will relyexclusively on additional revenue compared to the additional costsincurred due to further processing.

further process or sale!!! new

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