Cobe Company has already manufactured 22,000 units of Product A at a cost of $30 per unit. The 22,000 units can be sold at this stage for $490,000. Alternatively, the units can be further processed at a $300,000 total additional cost and be converted into 5,400 units of Product B and 11,700 units of Product C. Per unit selling price for Product B is $106 and for Product C is $50. Prepare an analysis that shows whether the 22,000 units of Product A should be processed further or not.

Since processing further will result in a profit of $197,400 as against a loss of $170,000 if not processed further, Product A should be processed further.

Explanation:

Cobe Company

Analysis of Product A

Details Sell as is ($) Process further ($)

Sales:

Product A 490,000

Product B (w.1) 572,400

Product C (w.2) 585,000

Relevant cost:

Initial manufacturing cost (w.3) (660,000) (660,000)

Further processing cost - (300,000)

Income / (loss) (170,000) 197,400

Since processing further will result in a profit of $197,400 as against a loss of $170,000 if not processed further, Product A should be processed further.

Workings:

w.1: Sales value of Product B = $106 * 5,400 = $572,400

w.2: Sales value of Product C = $50 * 11,700 = $585,000

w.3: Initial manufacturing cost = $30 * 22,000 = $660,000