Rogertree Company manufactures a number of products from the same raw material.

Question

Rogertree Company manufactures a number of products from the same raw material. Joint processing costs total $10,000 per month. Product A could be sold at the cut-off point for $18,000 per month or it can be further processed at a cost of $9,000 per month and then sold for $35,000. Rogertree Company should:

Further process product A because its incremental revenues will exceed incremental costs by $8,000.

Further process product A because its incremental revenues will exceed incremental costs by $26,000.

Sell as-is because the incremental loss is $2,000 if processed further.

Further process product A because its incremental revenues will exceed incremental costs by $16,000.

Explanation / Answer

Answer: Further process product A because its incremental revenues will exceed incremental costs by $8,000.

Incremental profit from further processing of product A

= Incremental revenue - incremental cost (further processing cost)

= ($35000 - $18000) - $9000

= $17000 - $9000

= $8000

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