Cobe Company has already manufactured 16,000 units of Product A at a cost of $25

Question

Cobe Company has already manufactured 16,000 units of Product A at a cost of $25 per unit. The 16,000 units can be sold at this stage for $400,000. Alternatively, the units can be further processed at a $270,000 total additional cost and be converted into 5,400 units of Product B and 11,100 units of Product C. Per unit selling price for Product B is $101 and for Product C is $52.

Cobe Company has already manufactured 16,000 units of Product A at a cost of $25 per unit. The 16,000 units can be sold at this stage for $400,000. Alternatively, the units can be further processed at a $270,000 total additional cost and be converted into 5,400 units of Product B and 11,100 units of Product C. Per unit selling price for Product B is $101 and for Product C is $52.

1. Prepare an analysis that shows whether the 16,000 units of Product A should be processed further or Sell as is Process further Sales Relevant costs: Total relevant costs Income (loss) Incremental net income (or loss) if processed further The company should

Explanation / Answer

SELL AS IT IS:-

Sale of 16000 units

400000

Less: Cost of 16000 units

(16000 *$25)

(400000)

Profit

0

IF PROCESSED FURTHER :-

Sale of Product B

(5400 units * $101)

545400

Sale of Product C

(11,100 units * $52)

577200

Total Sales

1122600

Less: Additional cost

$(270,000)

         Cost of 16000 units

$ (400,000)

(670000)

Profit

452600

Incremental Profit if processed further

Profit if processed further

452600

Less: Profit if sold as it is

0

Incremental Profit if processed further

452,600

The company should process further as it will earn more profit for company.

SELL AS IT IS:-

Sale of 16000 units

400000

Less: Cost of 16000 units

(16000 *$25)

(400000)

Profit

0

IF PROCESSED FURTHER :-

Sale of Product B

(5400 units * $101)

545400

Sale of Product C

(11,100 units * $52)

577200

Total Sales

1122600

Less: Additional cost

$(270,000)

         Cost of 16000 units

$ (400,000)

(670000)

Profit

452600

Incremental Profit if processed further

Profit if processed further

452600

Less: Profit if sold as it is

0

Incremental Profit if processed further

452,600

The company should process further as it will earn more profit for company.

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