Question

A company has already incurred \(5,000 of costs in producing 6,000 units of Product XY. Product XY can be sold as is for \)15 per unit. Instead, the company could incur further processing costs of \(8 per unit and sell the resulting product for \)21 per unit. Should the company sell Product XY as is or process it further?

Short answer

The company will earn an income of $85,000 when they sell the product as it is.

Step-by-step solution

Definition of incremental net income

The incremental net income is the company’s income after choosing an alternative course of action.

Calculation of incremental income

Particular	Sell as it is	Process Further
Sales	$90,000	$126,000
Additional processing cost	($5,000)	($48,000)
Income/Loss	$85,000	$78,000

The company should sell the product as is because selling the product as is the company will earn more income than processing it further.

Notes:

$\begin{array}{rcl}& & \mathbf{\text{Calculation}}\mathbf{ }\mathbf{ }\mathbf{\text{of}}\mathbf{ }\mathbf{ }\mathbf{\text{incremental}}\mathbf{ }\mathbf{ }\mathbf{\text{cost =}}\mathbf{ }\mathbf{\text{Total}}\mathbf{ }\mathbf{ }\mathbf{\text{units}}\mathbf{ }\mathbf{\times }\mathbf{\text{Cost}}\mathbf{ }\mathbf{ }\mathbf{\text{per}}\mathbf{ }\mathbf{ }\mathbf{\text{unit}}\\ & & \mathbf{\text{=}}\mathbf{ }\mathbf{6}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\text{\$ 8}}\\ & & \mathbf{\text{=}}\mathbf{ }\mathbf{ }\mathbf{\text{\$ 48,000}}\\ & & \end{array}$