Question

A manufacturing company currently produces 1,000 units of a product at a cost of $5,000. The units sell for $7,000. Alternatively, the company can process further to produce a refined product that will sell for $10,000. The additional processing will cost $4,000. The company should:

Answer 1

The company should not process the product further as the initial manufacturing yields a higher profit. A cost-benefit analysis reveals that additional processing leads to a decrease in profit from $2,000 to $1,000.

Step-by-step explanation:

The manufacturing company is facing a decision related to incremental cost analysis, a concept in managerial accounting that helps determine the financial advantage or disadvantage of choosing one option over another. To resolve this, they could perform a cost-benefit analysis to understand the potential financial outcome of further processing the product.

Currently, without additional processing, the company makes a profit of $7,000 - $5,000 = $2,000 for producing 1,000 units. If they choose to process the product further, the additional processing costs will be $4,000, making their total cost $9,000 ($5,000 initial + $4,000 additional). However, the refined product would sell for $10,000, giving a profit of $1,000 ($10,000 - $9,000).

Comparing the profits, without additional processing the profit is $2,000, whereas with additional processing the profit decreases to $1,000. Therefore, the company should not proceed with the additional processing as it reduces the overall profit.

Answer 2

The company should not further process the product as it results in income reduction by $1000.

Step-by-step explanation:

According to the given data, company current profit for 1000 units is :

= (cost of sell) - (cost of manufacturing)

= $7000 - $5000

= $2000 (current profit)

While when company further process the product, the profit will be :

= (cost of sell) - (cost of manufacture)

= $10000 - ( $5000 + $4000)

= $10000 - $9000

= $1000

It clearly shows that further processing the product may result in reduction of profit by $1000.

Hence the company should not further process the product.