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Can you take a look at Example 5: Further processing decision in relevant cost from the technical articles.I am confused about the following:
Component A can be converted into Product A if $6,000 is spent on further processing. Product A would sell for $12,000.
Component B can be converted into Product B if $8,000 is spent on further processing. Product B would sell for $15,000.
They have the choice of selling the products immediately or doing further work on them and then selling them at a higher price.
For Product A, if they sell immediately they will receive $7,000. If they choose to do further processing then they will be able to sell them for $12,000 and so get an additional $5,000. However the further processing would cost an extra $6,000, so it is not worth spending $6,000 to only gain an extra $5,000. They will not do the extra processing.
For product B, if they sell immediately they will receive $4,000. If they choose to do further processing then they will be able to sell them for $15,000 and so get an additional $11,000. The further processing will cost $8,000, So they will do the extra processing because it will increase the profit by 11,000 – 8,000 = $3,000.
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