Question

Cobe company has manufactured 220 partially finished cabinets at a cost of $55,000. these can be sold as is for $66,000. instead, the cabinets can be stained and fitted with hardware to make finished cabinets. further processing costs would be $13,200, and the finished cabinets could be sold for $88,000.

Should the cabinets be sold as is or processed further and then sold?

Answer 1

The cabinets should be processed further before selling because the additional processing cost is less than the incremental revenue gained, leading to an increased profit of $8,800.

Step-by-step explanation:

Should Cabinets be Sold as Is or Processed Further?

The decision to sell the cabinets as is or process them further should be based on a cost-benefit analysis. The sunk cost of the cabinets, which is $55,000, is irrelevant to this decision because it cannot be recovered. The relevant costs are the additional processing costs and the potential sales revenue before and after further processing. As is, the cabinets can be sold for $66,000. If processed further for an additional cost of $13,200, they could be sold for $88,000. The incremental revenue from further processing would be $22,000 ($88,000 - $66,000), which exceeds the incremental costs of $13,200. Therefore, processing the cabinets further would yield an additional profit of $8,800 ($22,000 - $13,200).

To summarize, the cabinets should be processed further and then sold, as the additional processing leads to increased profits.