Question

QS 23-10 Sell or process further LO A1 Holmes Company produces a product that can be either sold as is or processed further. Holmes has already spent $74,000 to produce 1,325 units that can be sold now for $79,500 to another manufacturer. Alternatively, Holmes can process the units further at an incremental cost of $280 per unit. If Holmes processes further, the units can be sold for $460 each. Compute the incremental income if Holmes processes further.

Answer 1

Answer:

It is more profitable to continue processing and sell the units for $460.

Explanation:

Giving the following information:

Sell as-is:

Selling price= $79,500

Continue processing:

Selling price= $460

Unitary incremental cost= $280

Units= 1,325

The firsts $74,000 is a sunk cost, this means that the cost will remain the same in both options. It is irrelevant to the decision-making process.

Sell as-is:

Effect on income= $79,500

Continue processing:

Effect on income= 1,325*(460-280)= $238,500

It is more profitable to continue processing and sell the units for $460.