Question

Cobe Company has manufactured 230 partially finished cabinets at a cost of $57,500. These can be sold as is for $69,000. Instead, the cabinets can be stained and fitted with hardware to make finished cabinets. Further processing costs would be $13,800, and the finished cabinets could be sold for $92,000.

(a) Prepare a sell as is or process further analysis of income effects.
(b) Should the cabinets be sold as is or processed further and then sold?

Answer 1

Incremental analysis reveals that processing the cabinets further before selling them will result in a higher net income of $20,700 compared to $11,500 if sold as is, yielding an additional profit of $9,200. Hence, Cobe Company should opt to process the cabinets further.

Step-by-step explanation:

Sell as Is or Process Further Analysis

To determine whether Cobe Company should sell the cabinets as is or process them further, we need to perform an incremental analysis comparing the net income under both scenarios. Currently, the cabinets can be sold for $69,000 without any additional work. If processed further, an additional cost of $13,800 will be incurred, but the cabinets could be sold for $92,000.

Sell as is:
Sale Revenue = $69,000
Cost = -$57,500
Net Income = $11,500

Process further:
Sale Revenue = $92,000
Additional Cost = -$13,800
Total Cost = Cost + Additional Cost = -$57,500 - $13,800 = -$71,300
Net Income = Sale Revenue - Total Cost = $92,000 - $71,300 = $20,700

The additional processing results in a higher net income by $20,700 - $11,500 = $9,200. Therefore, Cobe Company would benefit financially from processing the cabinets further before selling them.