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Selling a coffee batch as it stands yields $19,500 of income, and processing it further yields $2,100 more. What should the company do?
ASell it now, since the loss on processing is $2,100
BSell it now, since evaporation removes 4% of value
CProcess it, since the evaporation loss is recovered
DProcess it, since income rises by $2,100 per batch
Answer & Solution
Correct answer: D. Process it, since income rises by $2,100 per batch
1. A differential analysis compares the revenues of the two options first, then their respective costs.
2. Processing lifts revenue from $48,500 to $60,500 but adds $7,480 of processing cost.
3. It also carries an evaporation charge of $2,420.
4. Even after both extra costs, income is $2,100 higher than selling the batch as it stands.
5. The company should process the batch further.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.5 Sell a Product or Process Further_
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