Princeton Avionics makes aircraft instrumentation. Its basic navigation radio requires $60 in variable costs and $4,000 per month in fixed costs. Princeton sells 20 radios per month. If the company further processes the radio, to enhance its functionality, it will require an additional $40 per unit of variable costs, plus an increase in fixed costs of $500 per month. The current sales price of the radio is $280. The CEO wishes to improve operating income by $1,200 per month by selling the enhanced version of the radio. In order to meet this target, the sales price to be charged for the enhanced product is

Sales price =$405

Explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.  

Also note that all cost incurred up to the split-off point are irrelevant to the decision to process further .  

                                                                                   $

Sales revenue after the split-off point                       y

Sales revenue at the split-off point (280×20)          (5,600)  

Further processing cost (40× 20)+ 500                    (1,300)    

Net advantage from further processing                    1,200

y-5600-1300=1200

y= 8,100

Sales price=  Sales revenue after the split-off point/Number of units

Sales price = 8,100/20 =$405  

Sales price =$405

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