Cobe Company has already manufactured 19,000 units of Product A at a cost of $25 per unit. The 19,000 units can be sold at this stage for $400,000. Alternatively, the units can be further processed at a $200,000 total additional cost and be converted into 5,200 units of Product B and 11,000 units of Product C. Per unit selling price for Product B is $108 and for Product C is $55. 1. Prepare an analysis that shows whether the 19,000 units of Product A should be processed further or not.

Incremental net income from further processing is  $566,600

Explanation:

First of all, it would be necessary to compute profit from selling the product at cut off point and profit when it is further processed in order to determine whether or not it is worth processing further:

Sales revenue                                        $400,000

cost of production(19,000*$25)            $475,000

Loss from selling                                  ($75,000)

Further processing:

sales revenue

Product B(5200*$108)                       $561,600

Product C(11,000*$55)                       $605,000

Total revenue                                     $1,166,600

total cost

cost of production                              ($475,000)

cost of further processing                 ($200,000)

total costs                                           ($675,000)

Profit                                                    $491600

By further processing the incremental net profit is $566,600 ($491,600-(-$75000)

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