Question

Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $33 per pound and costs $28 per pound to produce. Product C would sell for $58 per pound and would require an additional cost of $25 per pound to produce. What is the differential cost of producing Product C?

Answer 1

Differential cost of producing Product C = $0

Step-by-step explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.

Also note that all cost incurred up to the split-off point (the cost of crushing) are irrelevant to the decision to process further .

$

Sales revenue after the split off point (Product C) 58

Sales revenue at the split-off point (Product B 33

Additional sales revenue per unit 25

Further processing cost (25)

Differential cost of Product C 0

Differential cost of producing Product C = $0

Note that the cost incurred up until the split off point was not included because it is Irrelevant to the decision to process further. It has already been incurred , hence it is a sunk cost