Question

• Discuss the decision making steps that management must take when deciding to sell or process further.

Answer 1

Answer:

To decide whether to sell the product or process further is crucial decision and requires cost and benefit analysis.

The management should follow the following steps.

1. Identify the cost of the product and sales value of the product to calculate profit.

2. Identify the cost of processing and sales value of products generated after processing to calculate profit.

3. Calculate the incremental cost and incremental benefit. If the incremental benefit is more than incremental cost, the management should process. If the incremental cost is greater than the incremental benefit, then the management should decide to sell the products.

Example:

Consider the selling of raw milk. If the company sells raw milk, it costs 200,000 dollars and the company sells it 250,000 dollars.

If the company process the milk and separate whole milk and cream, the company has to bear the cost of 200,000 dollars for processing. The company can sell the cream at 300,000 dollars and whole milk at 200,000 dollars. Here, the company has more benefit than the processing cost. So the company should process further. Assume the company is planning to process cream to sour cream. The incremental cost is 100,000 dollars, while the sales value of sour cream is 80,000 dollars. The company should not process further and sell the cream only.

Hope the answer will help. Thank you.