Question

Holmes Company produces a product that can be either sold as is or processed further. Holmes has already spent $92,000 to produce 2,000 units that can be sold now for $83,500 to another manufacturer. Alternatively, Holmes can process the units further at an incremental cost of $280 per unit. If Holmes processes further, the units can be sold for $470 each. Should Holmes sell the product now or process it further

Answer 1

Question

Holmes Company produces a product that can be either sold as is or processed further. Holmes has already spent $92,000 to produce 2,000 units that can be sold now for $830,500 to another manufacturer. Alternatively, Holmes can process the units further at an incremental cost of $280 per unit. If Holmes processes further, the units can be sold for $470 each. Should Holmes sell the product now or process it further

Answer:

Holmes should not process further  because doing so would produce a

net loss of $(450,500)      

Explanation:

A firm should process further if the additional sales revenue from further processing is higher than the further processing cost.

                                                                                        $

Revenue after further processing (2,000×470) =   940,000

Sales revenue at the split off point                        (830,500)

Additional sale revenue                                              109,500

Further processing cost (280× 2,000)                     (560,000)

Net loss                                                                      450,500        

Net loss from further processing =$450,500      

Holmes should not process further