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Sell or Process Further - capacity that is expected to...

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Sell or Process Further Many manufacturers have the option of selling products at a given point in the production cycle or continuing to process with the expectation of selling them at a higher price. For example, a bicycle manufacturer such as Schwinn could sell its 10-speed bicycles to retailers either unassembled or assembled. A furniture manufacturer such as Ethan Allen could sell its dining room sets to furniture stores either unfinished or finished. The sell-or-process-further decision should be made on the basis of incremental analysis. The basic decision rule is: Process further as long as the incremental revenue from such processing exceeds the incremental processing costs. Assume, for example, that Woodmasters Inc. makes tables. The cost to manufacture an unfinished table is $35, computed as follows. Illustration 23-7 Per unit cost of unfinished table The selling price per unfinished unit is $50. Woodmasters currently has unused productive
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Unformatted text preview: capacity that is expected to continue indefinitely. Management concludes that some of this capacity can be used to finish the tables and sell them at $60 per unit. For a finished table, direct materials will increase $2 and direct labor costs will increase $4. Variable manufacturing overhead costs will increase by $2.40 (60% of direct labor). No increase is anticipated in fixed manufacturing overhead. Illustration 23-8 shows the incremental analysis on a per unit basis. Illustration 23-8 Incremental analysis—sell or process further Helpful Hint Current net income is known. Net income from processing further is an estimate. In making its decision, management could add a “risk” factor for the estimate. It is advantageous for Woodmaster to process the tables further. The incremental revenue of $10.00 from the additional processing is $1.60 higher than the incremental processing costs of $8.40....
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