Question
Holmes Company produces a product that can be either sold as is or processed further. Holmes has already spent $92,000 to produce 2,000 units that can be sold now for $830,500 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 $470 each. Should Holmes sell the product now or process it further
Answer:
Holmes should not process further because doing so would produce a
net loss of $(450,500)
Explanation:
A firm should process further if the additional sales revenue from further processing is higher than the further processing cost.
$
Revenue after further processing (2,000×470) = 940,000
Sales revenue at the split off point <u> (830,500)</u>
Additional sale revenue 109,500
Further processing cost (280× 2,000) <u> (560,000)</u>
Net loss <u> 450,500 </u>
Net loss from further processing =$450,500
Holmes should not process further