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Cobe Company has already manufactured 23,000 units of Product A at a cost of $30 per unit. The 23,000 units can be sold at this stage for $450,000. Alternatively, the units can be further processed at a $250,000 total additional cost and be converted into 5,900 units of Product B and 11,400 units of Product C. Per unit selling price for Product B is $109 and for Product C is $54. 1. Prepare an analysis that shows whether the 23,000 units of Product A should be processed further or not.

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Answer:

Net advantage from further processing   $558,700

Explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.  

Also note that all cost incurred up to the split-off point are irrelevant to the decision to process further .  

                                                                                                           $

Sales revenue after the split-off point

Product B ( 5,900 ×109)                                                                 643,100                  

Product C (11,400× $54)                                                                615,600

Sales revenue at the split-off point                                              450,000

Additional sales revenue                                                                808,700

Further processing cost                                                                  (250,000)

Net advantage from further processing                                          558,700

Note that all costs incurred up to the split-off points are irrelevant i.e $30 per unit to produce product A. Whether or  not  the products are processed further they would be incurred. As such, they would not be considered in the analysis.

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