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Cost Accounting for Decision-making. Lesson 8. Part III. Different Types of Business Decisions (Sell or Process Further). Five Types of Business Decisions. Hire, make or buy Accept or reject an order at a special price Eliminate or retain an unprofitable segment
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Cost Accounting for Decision-making Lesson 8
Part III Different Types of Business Decisions (Sell or Process Further)
Five Types of Business Decisions • Hire, make or buy • Accept or reject an order at a special price • Eliminate or retain an unprofitable segment • Retain or replace equipment • Sell or process further
Sell or Process Further Decisions Some companies are able to sell their products at different stages of completion. Example: Companies in food processing and natural resources industries. In deciding when should the sales be made, the following will be considered: • How much revenue can we get if we sell the products now? • How much net benefit can we gain if we sell the products after further processing?
Example for Sell or Process Further Decisions Suki grows peaches in Japan. She can either sell them to the local supermarket after harvest, or further process them into peach juice for selling to the tourists in farmers’ market. In the former case, Suki can sell the peaches in 2.5 kg per box at 100 boxes for $500 each; in the latter case, she can make 3,000 cups of juice with additional costs of $4 per cup for $28 each. Should Suki sell the peaches in boxes or further process them into peach juice?
Points to Note for Making the Decision • What is the revenue from selling the peaches in boxes? • What is the net benefit from processing the peach into juice? • Compare the difference and make a conclusion.
Suggested Solution Revenue from selling the peaches in boxes = $500 x 100 = $50,000 Net benefit from further processing = ($28 - $4) x 3,000 = $72,000 Suki should further process the peaches into peach juice because she will earn $22,000 ($72,000 - $50,000) more.
Classwork Alan Company has 10,000 units of unfinished ‘Model A’ on hand, each of which had already incurred a production cost of $80. The company can either sell them at their current state for $90 each, or to complete the product at a cost of $15 per unit for $107. Total fixed costs relating to the production of the ‘Model A’ is $42,000. Should the company sell ‘Model A’ at present or process further?
Suggested Solution Net benefit / (loss) from process further Alan Company should further process the ‘Model A’ because it will earn $20,000 more.
Conclusion As a conclusion, managers have to use both financial and non-financial information in making rational decisions. If they can apply the costing concepts and techniques in making business decisions, they are able to allocate resources more efficiently and at the same time minimize their business risks for higher profitability.
