Question

Cobe Company has already manufactured 19,000 units of Product A at a cost of $15 per unit. The 19,000 units can be sold at this stage for $430,000. Alternatively, the units can be further processed at a $300,000 total additional cost and be converted into 5,300 units of Product B and 11,600 units of Product C. Per unit selling price for Product B is $100 and for Product C is $54. 1. Prepare an analysis that shows whether the 19,000 units of Product A should be processed further or not?

Answer 1

Product A should be processed further

Step-by-step explanation:

Scenario 1

Cobe company produces only product A, we have:

Number of units (n) = 19,000, Unit cost (u) = $15

Cost of Production (C) = number of units * unit price

C = n * u = 19,000 * 15

C = 285,000

Revenue = Sale Price - Cost of Production

Revenue = $ (430,000 - 285,000)

Revenue = $145,000

Scenario 2 (Alternative option)

In this case, product A is converted into products B and C; in doing so, an additional cost of $300,000 is incurred

Cobe company produces products B & C, we have:

Production cost of product A = $285,000,

Number of units (product B) = 5,300, Selling price (product B) = $100,

Number of units (product C) = 11,600, Selling price (product C) = $54, Additional cost (X) = $300,000

Revenue = Revenue (product B) + Revenue (product C)

Revenue = number of units * selling price

Revenue = (5,300 * 100) + (11,600 * 54)

Revenue = $1,156,400

The Net Revenue is given by the difference between the Total Revenue and the additional cost incurred

Net Revenue = Revenue - (Production cost + Additional cost)

Net Revenue = $ [1,156,400 - (285,000 + 300,000)]

Net Revenue = $571,400

The Net Revenue from Scenario 2 is most 4x that from Scenario 1

Hence, Product A should be processed further as it will bring maximum profit to Cobe company