Sell Now or Process Further?

Product A. Whole Milk Incremental Cost: $55,000

Sales
Cost: $200,000

Process Further
Volume:
Non-Fat Milk
$240,000
Joint Product Cost Split-off point
Sales
Volume:
$300,000

Separation Process
Joint
Products

Process Further
Sales
Cost: $300,000 Volume:
Product B. $500,000
Cream Sales Sour Cream
Volume:
$360,000 Incremental Cost: $150,000
 $ $

(50% each)

$ $

Joint Product cost are Irrelevant

Separable Cost are relevant

$ $

$ $
Should the
company Sell or
process further
Product A, how
about Product
B?
 $ $

$ $

Conclusion:

Product A should be process further, Product B should

be sold at the split-off point.
ADD OR DROP a
Product or other
Segments?

OR
NOT
Important factor in deciding whether to add
or drop a product is the decision’s
EFFECTS ON
OPERATING INCOME
 EXAMPLE
Illustrative Problem 18.4. Add or Drop a Product line
Management is considering discontinuing
product C operations.
a. Assuming no other changes are expected,
should company drop Product C?
ANALYSIS:
P 300,000 Product C has a positive
contribution to indirect
- 240,000
costs of 20,000 and
- 40,000 therefore, should not be
P 20,000 eliminated.

Overall Income will decrease

by P20,000 if the company
will drop Product C.
b. Assuming that in addition to the given data
given, the following changes are expected.

1.Sales of Product A and Product B

increase by 10% and 15% respectively.
2.Marketing cost will remain
unchanged.
3.Salaries of Product A and Product B’s
product line supervisors would
increase by 8% and 10% respectively
 1. Sales of Product A and
Product B increase by 10%
and 15% respectively.
A (Sales)= P400,000 + (P400,000 x 0.10)
= P400,000 + P40,000
= P440,000
B (Sales)= P360,000 + (P360,000 x 0.15)
= P360,000 + P54,000
= P414,000

2. Marketing cost will

3. Salaries of Product A and Product B’s product
line supervisors would increase by 8% and 10% remain unchanged.
respectively due to the increased sales .
A (Salary)= P30,000 + (P30,000 x 0.08)
= P30,000 + P2,400
= P32,400
4. No increase in total
B (Salary)= P32,000 + (P32,000 x 0.10) assets is required.
= P32,000 + P3,200
= P35,200
 2. Marketing cost will remain
unchanged.
A = P440,000/P854,000 x P21,200
= 0.515222482 x 21,200
= P10,922.72 or P10,923
B = P414,000/P854,000 x P21,200
= 0.484777517 x P21,200
= P10,277.28337 or P10,277
Variable Expenses
A = P280,000 + (280,000 x 0.10)
= 280,000 + 28,000
= P308,000
B = P216,000 (P216,000 x 0.15)
= P216,000 + 32,400
=P248,400
Should the
company
drop
Product C?
Based on the computation, the company
may decide to drop Product C