9.5: Sell a Product or Process Further

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A manufactured item may be produced in various stages or processes. In some cases, the initial production yields one finished product and processing it further results in a different product. In other cases, there may be a market for a partially completed manufactured good, where the buyer ultimately completes the product to its own specifications. A manufacturer may have to decide whether to sell a product at an initial stage or process it further. The preferred choice is the one that is more financially beneficial.

Example

Morning Roast Coffee, Inc. produces dark roast coffee in batches of 5,000 pounds. Materials cost is $5.80 per pound. The dark roast coffee can be sold without further processing for $9.70 per pound or may be processed further to yield dark roast decaf, which can be sold for $12.10 per pound. The processing into decaf requires additional costs of $7,480 per batch. The additional processing will also cause a 4% loss of product due to evaporation.

	Sell	Process	Difference
Revenue¹	$48,500	$60,500
Costs:
$\ \quad \quad$Materials cost²	29,000	36,480
$\ \quad \quad$Evaporation³		2,420
Income	$19,500	$9,800	$2,100

¹ 5,000 x $9.70 $\ \quad \quad$5,000 x $12.10

² 5,000 x $5.80 $\ \quad \quad$5,000 x $5.80 + $7,480

³ $60,500 x 4%

The differential analysis first considers the different revenues from each alternative and then the respective costs. Even with the 4% product loss from processing further, the decaf coffee results in higher income. The company shouldprocess the batch further.