Cobe Company has already manufactured 25,000 units of Product A at a cost of $15 per unit. The 25,000 units can be sold at this stage for $480,000. Alternatively, the units can be further processed at a $240,000 total additional cost and be converted into 5,400 units of Product B and 11,100 units of Product C. Per unit selling price for Product B is $104 and for Product C is $53 Prepare an analysis that shows whether the 21,000 units of Product A should be processed further or not.
Sell as in Process further
Sales
Relevant costs:
Total relevant costs
Income (loss)
Incremental net income (or loss) if processed further
The company should

Incremental income from further processing   $534,900  

The company should process further

Explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.  

Also note that all cost incurred up to the split-off point are irrelevant to the decision to process further .  

                                                                                                 $

Revenue after split-off point

(104×5400) + (53× 11,100)                                                   1,149,900

Revenue at the slit of  point                  

(25,000× $15)                                                                       (375,000 )

Additional income from further processing                        774,900

Further processing cost                                                     (240,000)

Incremental income from further processing                     534,900  

Incremental income from further processing                   $534,900  

The company should process further

c.

clarify customers’ doubts only when asked.

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