Chapter 16, Problem 16.1ME

To determine

Concept Introduction:

Sell or Process Further Decisions:

A company may have to take a decision to sell a product without processing or selling it after further processing. In this decision making the Profit under both the options are compared and decision is taken for the higher profit option.

If the company should sell the product or process it further

Answer to Problem 16.1ME

It shall be better to sell the product without further processing.

Explanation of Solution

The decision is taken on the basis of the following analysis:

	Sell	Process Further
Sales Revenue	$ 36.00	$ 40.00
Less: Costs:
Direct Material	$ 10.00	$ 12.00
		(10*120%)
Direct labor	$ 12.00	$ 14.40
		(12*120%)
Variable Overhead	$ 5.00	$ 5.00
Fixed Overhead	$ 5.00	$ 5.00
Net Profit	$ 4.00	$ 3.60

Hence it shall be better to sell the product without further processing.