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115.The decision rule on whether to sell or process furthera.varies from situation to situation.b.is process further as long as total revenue exceeds present revenues.c.is process further if incremental revenue from such processing exceedsincremental fixed costs.d.is process further if incremental revenue from such processing exceedsthe incremental processing costs.
116.Eddy Company is starting business and is unsure of whether to sell itsproduct assembled or unassembled. The unit cost of the unassembledproduct is €60 and Eddy Company would sell it for €135. The cost toassemble the product is estimated at €27 per unit and Eddy Companybelieves the market would support a price of €174 on the assembled unit.What is the correct decision using the sell or process further decision rule?
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117.Mallory Company manufactures widgets. Bowden Company has approachedMallory with a proposal to sell the company widgets at a price of £82,000 for100,000 units. Mallory is currently making these components in its ownfactory. The following costs are associated with this part of the process when100,000 units are produced:Direct material£31,000Direct labor29,000Manufacturing overhead40,000Total£100,000The manufacturing overhead includes £16,000 of costs that will be eliminatedif the components are no longer produced by Mallory. From Mallory’s point ofview, how much is the incremental cost or savings if the widgets are boughtinstead of made?
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What is the Sell or Process Further Decision?
The sell or process further decision is the choice of selling a product now or processing it further to earn additional revenue. This choice is based on an incremental analysis of whether the additional revenues to be gained will exceed the additional costs to be incurred as part of the additional processing work. For example, if a green widget can be converted into a red widget at an incremental cost of $1.00 per unit, then processing further is a good idea as long as the incremental price gain to be achieved is at least $1.01 per unit.
The sell or process further decision most commonly arises when two or more products are generated by a manufacturing process. At the point when the products can be split apart (the split-off point), there is a choice to sell the goods immediately or attempt to capture additional value by engaging in more processing. This decision may vary over time, based on changes in the market prices of a product at each stage of processing. If the market price declines for a later-stage product, it can make more sense to sell it without additional processing. Conversely, if the market price increases for a later-stage product, the better choice may be to continue with additional processing in order to reap higher profits.
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