Question

(just need a response to this) at least 150 words

the decision rule for sell a product as is or process further is if the additional revenue from processing further exceeds the additional cost of processing further, then process further. However, if the additional revenue from processing further is less than the additional cost of processing further, then sell as is and do not process further.

Answer 1

The choice between selling a product at the split-off point or processing it further is a short run operating decision. Additional processing adds value to a product, and increases its selling price beyond the amount for which it could be sold at split off. The decision to process further depends on whether the increase in total revenues exceeds the additional costs incurred for processing beyond split off. The joint costs incurred upto the split off point are not relevant to the decision making here.

There are two situations under which a sell or process further decision could occur:

a. The form is evaluating the possibility of processing beyond split off, and must incur certain equipment and other fixed costs; or

b. The firm already processes a product beyong split off, and has already invested in the required infrastructure.

The first situation is a capital budgeting problem, and here it is not sufficient to simply determine whether incremental revenues exceed incremental costs. Since new investments are involved the ROI should also be considered.

In the second situation however, the relevant costs are only those costs which relate to the additional processing of each product beyond the split-off point. The joint costs incurred upto the split off are not relevant to the decision, as they have already been incurred, and the decision of whether to sell at split off or process further would not change the joint costs. Variable costs and certain fixed costs ( e.g. supervisory salaries) to be incurred additionally if the products were to be processed further would be relevant, but not the common allocated fixed costs which would be incurred regardless of the decision. Depreciation expense would never be relevant, as it an allocation of the book value of the equipment, which is a sunk cost. Opportunity costs ( e.g. alternative uses of the facilities) would be relevant however.