Chapter 26, Problem 26.6BE

To determine

Sell or process-further decision:

The purpose of sell or process-further decision is to choose an appropriate alternative that maximizes the operating income. It uses incremental analysis which determines the incremental revenue.

Incremental revenue refers to the difference in the total revenue earned when the product or service is sold at split-off point and the total revenue earned when the product or service is sold after further processing.

If the incremental revenue is more than the incremental costs, the product should be sold after further processing. If the incremental revenue is lesser than the incremental costs, the product should be sold at split-off point.

To prepare: An analysis to show whether the old machine must be retained or replaced.