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Cobe Company has already manufactured 18,000 units of Product A at a cost of $15 per unit. The 18,000 units can be sold at this stage for $490,000. Alternatively, the units can be further processed at a $230,000 total additional cost and be converted into 5,500 units of Product B and 11,900 units of Product C. Per unit selling price for Product B is $102 and for Product C is $50.

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

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Answer:

$176,000

Explanation:

Analysis that shows whether the 18,000 units of Product A should be processed further or not.

Sales as in; Process further

Sales $490,000

Process further and sales(5,500 ×102+11,900×50) - $1,156,000

Cost to process further - $490,000

Total relevant cost - $490,0000

Income (loss) $490,000 $666,000

Incremental net income or loss if process further $490,000-$666,000) - $176,000

There is an incremental net income due to process further which means the company should process further

Answer:

Yes, Product A should be processed further

Explanation:

Following is the analysis prepared to show whether the Product A should be processed further or not:

Processed further and sold:                                                                  $

Product B (5,500 x 102)                                                                  561,000

Product C (11,900 x 50)                                                                  595,000

Relevant Cost:

Cost to Process Further                                                               (230,000)

Net Income/(Loss)                                                                         926,000

Less: Sale Price of Product A                                                      (490,000)

Additional Net Income                                                                 436,000

If the Product B and C are processed and sold then further net income of $436,000 will be generated. Hence, the Product A should be processed further and must be converted to Product B and C.

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