Final answer:
In a sell or process further decision, a firm should continue processing a product if the incremental revenue of additional processing is greater than the incremental cost. Utilizing cost/benefit analysis and comparing marginal costs with marginal benefits is essential in this decision-making process. The firm should process further as long as the price per unit exceeds the average variable cost.
Step-by-step explanation:
In a sell or process further decision, when the incremental revenue from additional processing exceeds the incremental cost of that processing, the firm should choose to continue processing the product. This decision is informed by a cost/benefit analysis, where marginal costs are compared with marginal benefits to determine the financial viability of additional processing. A T-shaped chart in cost-benefit analysis helps in contrasting the costs on one side against the benefits on the other. If the benefits in terms of higher revenue outweigh the additional costs, the conclusion is to process the product further.
For example, if a company can sell a product at a given stage of production for a certain price but has the option to process it further for additional revenue, the company should only proceed if the expected extra revenue exceeds the costs associated with the extra processing. Following the provided example, if producing 5 more units of output generates $28 of price per unit, which is higher than the average variable cost (AVC) of $16.40 for those units, the firm should keep producing as it is economically beneficial.
In regard to production technology, firms will seek to substitute or adjust inputs when one becomes more expensive. They strive to maintain cost efficiency by either finding cheaper alternatives or by investing in technology that reduces dependency on the more expensive input.