Question

Farina Foods manufactures a dog food product called Special Scoops. Farina currently has 20,000 bags of Special Scoops in inventory. The variable production costs per bag are $1.50 and total fixed costs are $20,000 per period. The dog food can be sold as is for $7 per bag, or it can be processed further into Prime Scoops and Canine Sports at an additional processing cost of $3,000. This additional processing will yield 15,000 bags of Prime Scoops, which can be sold for $8 per bag, and 10,000 bags of Canine Sports, which can be sold for $6 per bag. Should Farina process the Special Scoops further to Prime Scoops and Canine Sports? Why or why not? Show your work?

Answer 1

Joint costs incurred are sunk costs since already incurred

Benefit of further processing = sales revenue after processing- sales revenue before processing - further processing costs

= 15000*8+10,000*6 - 20,000*7-3,000

=$37,000

Since there is net benefit from processing, the scoops should be processed further.