Question

Cobe Company has already manufactured 18,000 units of Product A at a cost of $20 per unit. The 18,000 units can be sold at this stage for $410,000. Alternatively, the units can be further processed at a $290,000 total additional cost and be converted into 5,800 units of Product B and 11,100 units of Product C. Per unit selling price for Product B is $104 and for Product C is $55.

1. Prepare an analysis that shows whether the 18,000 units of Product A should be processed further or not.

Answer 1

Comparative statement	Option 1	Option 2
	When not processed further	When processed further
Sales revenue
Sales of Product A	$4,10,000	-
Sales of product B	-	$6,03,200
Sales of product C	-	$6,10,500
Additional cost of production	-	(2,90,000)
Opportunity cost saved if not processed further	2,90,000
Profit	$7,00,000	$9,23,700
Incremental profit if processed further	$2,23,700
Note: The cost of Production of product A of $360,000 is irrelivant cost siince it will be incurred in both the options hence not been considered for decision making.
Explanation:
Option 1: If the Product A is not processed further then it will sold at $410,000, also the additional cost of processing of $290,000 will be saved.
Option 2: If product A is further processed into Product B & C it will result into a profit $923,700
Conclusion: There is an incremental profit of $223,700 if processed further into Product B & C hence product A should be further Processed.