Question

Holmes Company produces a product that can either be sold as is or processed further. Holmes has already spent $50,000 to produce 1,250 units that can be sold now for $67,500 to another manufacturer. Alternatively, Holmes can process the units further at an incremental cost of $250 per unit. If Holmes processes further, the units can be sold for $375 each. Compute the incremental income if Holmes processes further.

Answer 1

If Holmes processes the units further, the incremental income will be $156,250.

Step-by-step explanation:

In this case, if Holmes chooses to process the units further, the incremental income can be computed by subtracting the incremental cost from the incremental revenue. The incremental cost is calculated by multiplying the incremental cost per unit ($250) by the number of units (1,250), resulting in the value of $312,500. The incremental revenue is found by multiplying the selling price per unit ($375) by the number of units (1,250), which equals $468,750. Subtracting the incremental cost from the incremental revenue gives us an incremental income of $156,250.

Answer 2

It is more profitable to continue processing.

Step-by-step explanation:

Giving the following information:

The number of units= 1,250

It can be sold now for $67,500 to another manufacturer.

Alternatively, Holmes can process the units further at an incremental cost of $250 per unit. If Holmes processes further, the units can be sold for $375 each.

The $50,000 is a sunk cost, meaning that it has already happened. It shouldn't be taken into account.

Sell as it is:

Income= $67,500

Continue production:

Income= 1,250*(375 - 250)= $156,250

It is more profitable to continue processing.