Question

A company has a process that results in 24,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $160,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action?

Answer 1

Answer:

It should sell Product A as it is.

the impact of procees further is a loss for 16,000

Explanation:

We will check if the further process is a viable option for hte company's cost structure

additional revenue

(14 - 8) x 24,000 = 144,000

additonal cost      (160,000)

differential              (16,000)

We can sale the poudns at 8 or process further to receive 14

the differential revenue is 14 - 8 = 6 per pound

then we multiply this by the amount of pounds we produce.

This give us an additional revenue for 144,000

Our additional cost ofr this process are 160,000

The cost are greater than the proceeds, it is not viable. It should sell Product A as it is.

Further process generates a loss for 16,000