Question

Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $60 and Eddy Company would sell it for $135. The cost to assemble the product is estimated at $27 per unit and Eddy Company believes the market would support a price of $174 on the assembled unit. What is the correct decision using the sell or process further decision rule?
a. Sell before assembly, the company will be better off by $27 per unit.
b. Sell before assembly, the company will be better off by $39 per unit.
c. Process further, the company will be better off by $39 per unit.
d. Process further, the company will be better off by $12 per unit.

Answer 1

Answer:

d. Process further, the company will be better off by $12 per unit.

Explanation:

In order to make the decision we first analyse the costs and profit per unit of each decision.

Profits from unassembled product is as,

Profit = 135 - 60 = $75 per unit

Profits from assembled product is as,

Profits = 174 - 60 - 27 = $87 per unit

The differential is a positive profit = 87 - 75 = $12/ unit after assembly.

So the company should process further as there is an additional $12 to be made per unit.

Hope that helps.