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Sell or further Process Decision
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In process industries different products are seen at every stage of process. The companies can dispose of these products in the market directly or they can further process these products and sell it at a higher price. Differential cost analysis can be used for this purpose to know whether the product can be sold profitably or it requires further processing to charge a premium. If there is no further capital investment, the decision can be taken by comparing differential cost for processing and the incremental revenue.
Illustration
Deccan Agro Products Ltd., produces two joint products. The following cost information is available for the year 2007.
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Products
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Production in kgs
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Sale price (Rs.)
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X
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12,000
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30
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Y
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24,000
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40
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The product Y can be processed further and product Z can be produced. Product Z can be sold in the market at Rs.85 per kg. It requires an additional cost of Rs.10,000 to process 24,000 kg. of product Y and the output of this process will be 12,000 kg. of Z. You are required to help the management decide in this respect.
Solution
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Particulars
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Rs.
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Incremental revenue:
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Product Z = Rs.12,000 × 85
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9,84,000
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Product Y = Rs.24,000 × 40
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9,60,000
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Incremental revenue
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24,000
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Differential cost:
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Additional processing cost
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10,000
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Incremental profit
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14,000
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As the incremental profit is more than the differential cost, the company should further process the product Y into product Z.
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