Question

1. You are a furniture manufacturer, specializing in bookcases. You normally produce unpainted, unfinished bookcases and sell them for $200 a piece. To do so it costs $45 in materials, $60 in labour, and $35 in manufacturing overhead for one unit. As competition in this space has increased you have thought about refining your product by painting and waxing them. To refine it costs an additional $20/unit in materials, $35 in labour, and $15 in overhead. You believe based on market research that the further processed bookcase could be sold for $265. What should you do?

2.

Coco Corporation has a piece of machinery it has been using in operations for the past 5 years. It originally cost them $250,000 with an expected useful life of 8 years and no salvage value (they depreciate all assets using straight line method). It currently costs $45,000 a year to operate.

Lately they have been thinking of upgrading all operations by replacing machinery with up to date versions. A newer version of this machine would cost Coco $375,000, with expected annual operating costs much lower at $15,000 (due to it being much more efficient).

What should Coco do, assuming quality of product is the same for each machine?

Answer 1

1.in the decision making process of selling as is or further process, the incremental revenue should exceed incremental cost in order to favor further processing,

	sell without further process	sell after further process	incremental Revenue(Cost)
Revenue	$200	$265	65[265-200]
Less:
material	$45	$65[$45+20]	$20 [65-45]
Labor	$60	$95[60+35]	$35[95-60]
manufacturing overhead	$35	$50[35+15]	$15[50-35]
Net income	$60 [200-45-60-35]	[$55	($5) [65-20-35-15]

As we can see from above that there is decrease in $5 per unit when further processed.

so it should not be further processed.

.