Cobe Company has already manufactured 22,000 units of Product A at a cost of $30 per unit. The 22,000 units can be sold at this stage for $490,000. Alternatively, the units can be further processed at a $300,000 total additional cost and be converted into 5,400 units of Product B and 11,700 units of Product C. Per unit selling price for Product B is $106 and for Product C is $50. Prepare an analysis that shows whether the 22,000 units of Product A should be processed further or not.

Since processing further will result in a profit of $197,400 as against a loss of $170,000 if not processed further, Product A should be processed further.

Explanation:

Cobe Company

Analysis of Product A

Details                                          Sell as is ($)        Process further ($)    

Sales:

Product A                                         490,000  

Product B (w.1)                                                                   572,400

Product C (w.2)                                                                 585,000

Relevant cost:

Initial manufacturing cost (w.3)      (660,000)                (660,000)

Further processing cost                       -                         (300,000)  

Income / (loss)                               (170,000)                   197,400  

Since processing further will result in a profit of $197,400 as against a loss of $170,000 if not processed further, Product A should be processed further.

Workings:

w.1: Sales value of Product B = $106 * 5,400 = $572,400

w.2: Sales value of Product C = $50 * 11,700 = $585,000

w.3: Initial manufacturing cost = $30 * 22,000 = $660,000

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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