{"id":231,"date":"2021-01-26T22:27:48","date_gmt":"2021-01-26T22:27:48","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=231"},"modified":"2021-06-11T22:48:06","modified_gmt":"2021-06-11T22:48:06","slug":"sell-or-process-further","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/sell-or-process-further\/","title":{"raw":"Sell or Process Further","rendered":"Sell or Process Further"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Determine the selling point in the manufacturing process<\/li>\r\n<\/ul>\r\n<\/div>\r\nSometimes two or more products result from a common raw material or production process; these products are called<strong> joint products<\/strong>. Companies can process these products further or sell them in their current condition. For instance, when Chevron refines crude oil, it produces a wide variety of fuels, solvents, lubricants, and residual petrochemicals.\r\n\r\nManagement can use differential analysis to decide whether to process a joint product further or to sell it in its present condition. Joint costs are those costs incurred up to the point where the joint products split off from each other. These costs are sunk costs and are not considered when deciding whether to process a joint product further before selling it or to sell it in its condition at the split-off point.\r\n\r\nThe following example illustrates the issue of whether to process or sell joint products.\r\n\r\nColoure sells untinted enamel outdoor furniture paint in\u200b bulk, five-gallon containers to large home improvement stores. Each\u200b batch, processed at a cost of $840\u200b, yields 300 gallons of paint. Coloure sells the\u200b five-gallon buckets for \u200b$140 \u200beach, and spends \u200b$1.40 for each plastic tub.\r\n\r\nColoure has recently begun to reconsider its strategy. Management has asked if it would be more profitable to sell\u200b quarts of paint to small boutique stores and commissioned a market analysis that indicates that demand for the repackaged product exists.\r\n\r\nColoure could further process each batch of paint into 1,200 quarts and would sell quarts for \u200b$9. Packaging would cost $1.0 per\u200b portion, and pigment would cost $0.50 per portion. Fixed costs would not change.\r\n\r\nUsing a differential analysis, we would find that further processing (ignoring any additional capital expenditures) would yield $5,160 less per month in operating income (negative numbers are shown in red):\r\n<div align=\"left\">\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>Costs<\/td>\r\n<td>Sell As-Is<\/td>\r\n<td>Process Further<\/td>\r\n<td>Difference<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Expected revenue from selling in bulk<\/td>\r\n<td>$96,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Expected revenue from selling quarts<\/td>\r\n<td><\/td>\r\n<td>$108,000<\/td>\r\n<td>$12,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Costs of selling 5-gallon buckets<\/td>\r\n<td>840<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Additional costs of processing quarts<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Packaging<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Pigmentations<\/td>\r\n<td><\/td>\r\n<td>18,000<\/td>\r\n<td>17,160<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Difference<\/td>\r\n<td>$95,160<\/td>\r\n<td>$90,000<\/td>\r\n<td>$5,160<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWe can sell 600 five-gallon tubs for $160 to the big box-store retailers, who then mark it up to $200, or we can sell 12,000 quarts to smaller operations for $9, who then mark it up to $15. Gross sales to the box stores = 600 units * $160 = $96,000. Alternatively, gross sales to the boutique stores = 12,000 units * $9 = $108,000.\r\n\r\nHowever, additional costs to process into quarts = $1.5 * 12,000 units = $18,000 and the company only saves $840 by not buying 600 five-gallon tubs. Therefore, by processing further, the company would lose $5,160.\r\n\r\nCompanies use this same form of differential analysis to decide whether they should discard their by-products or process them further. By-products are additional products resulting from the production of a main product and generally have a small market value compared to the main product. Sometimes companies consider by-products to be waste materials. For example, the bark from trees cut into lumber is a by-product of lumber production. Although a by-product, companies convert this bark into fuel or landscaping material. When the differential revenue of further processing exceeds the differential cost, firms should do further processing. As concerns increase about the effects of waste on the environment, companies find more and more waste materials that can be converted into by-products.\r\n\r\nHere is a more detailed look at the decision-making process with regard to sell or process further:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352598&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=5bwD-jhZVHU&amp;video_target=tpm-plugin-76us6s98-5bwD-jhZVHU\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/SellOrProcessFurtherDecision_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Sell or Process Further Decision\" here (opens in new window)<\/a>.\r\n\r\nNow check your understanding of how to decide when to sell a product and when to keep processing it further.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]220638[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Determine the selling point in the manufacturing process<\/li>\n<\/ul>\n<\/div>\n<p>Sometimes two or more products result from a common raw material or production process; these products are called<strong> joint products<\/strong>. Companies can process these products further or sell them in their current condition. For instance, when Chevron refines crude oil, it produces a wide variety of fuels, solvents, lubricants, and residual petrochemicals.<\/p>\n<p>Management can use differential analysis to decide whether to process a joint product further or to sell it in its present condition. Joint costs are those costs incurred up to the point where the joint products split off from each other. These costs are sunk costs and are not considered when deciding whether to process a joint product further before selling it or to sell it in its condition at the split-off point.<\/p>\n<p>The following example illustrates the issue of whether to process or sell joint products.<\/p>\n<p>Coloure sells untinted enamel outdoor furniture paint in\u200b bulk, five-gallon containers to large home improvement stores. Each\u200b batch, processed at a cost of $840\u200b, yields 300 gallons of paint. Coloure sells the\u200b five-gallon buckets for \u200b$140 \u200beach, and spends \u200b$1.40 for each plastic tub.<\/p>\n<p>Coloure has recently begun to reconsider its strategy. Management has asked if it would be more profitable to sell\u200b quarts of paint to small boutique stores and commissioned a market analysis that indicates that demand for the repackaged product exists.<\/p>\n<p>Coloure could further process each batch of paint into 1,200 quarts and would sell quarts for \u200b$9. Packaging would cost $1.0 per\u200b portion, and pigment would cost $0.50 per portion. Fixed costs would not change.<\/p>\n<p>Using a differential analysis, we would find that further processing (ignoring any additional capital expenditures) would yield $5,160 less per month in operating income (negative numbers are shown in red):<\/p>\n<div style=\"text-align: left;\">\n<table>\n<tbody>\n<tr>\n<td>Costs<\/td>\n<td>Sell As-Is<\/td>\n<td>Process Further<\/td>\n<td>Difference<\/td>\n<\/tr>\n<tr>\n<td>Expected revenue from selling in bulk<\/td>\n<td>$96,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Expected revenue from selling quarts<\/td>\n<td><\/td>\n<td>$108,000<\/td>\n<td>$12,000<\/td>\n<\/tr>\n<tr>\n<td>Costs of selling 5-gallon buckets<\/td>\n<td>840<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Additional costs of processing quarts<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Packaging<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Pigmentations<\/td>\n<td><\/td>\n<td>18,000<\/td>\n<td>17,160<\/td>\n<\/tr>\n<tr>\n<td>Difference<\/td>\n<td>$95,160<\/td>\n<td>$90,000<\/td>\n<td>$5,160<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>We can sell 600 five-gallon tubs for $160 to the big box-store retailers, who then mark it up to $200, or we can sell 12,000 quarts to smaller operations for $9, who then mark it up to $15. Gross sales to the box stores = 600 units * $160 = $96,000. Alternatively, gross sales to the boutique stores = 12,000 units * $9 = $108,000.<\/p>\n<p>However, additional costs to process into quarts = $1.5 * 12,000 units = $18,000 and the company only saves $840 by not buying 600 five-gallon tubs. Therefore, by processing further, the company would lose $5,160.<\/p>\n<p>Companies use this same form of differential analysis to decide whether they should discard their by-products or process them further. By-products are additional products resulting from the production of a main product and generally have a small market value compared to the main product. Sometimes companies consider by-products to be waste materials. For example, the bark from trees cut into lumber is a by-product of lumber production. Although a by-product, companies convert this bark into fuel or landscaping material. When the differential revenue of further processing exceeds the differential cost, firms should do further processing. As concerns increase about the effects of waste on the environment, companies find more and more waste materials that can be converted into by-products.<\/p>\n<p>Here is a more detailed look at the decision-making process with regard to sell or process further:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352598&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=5bwD-jhZVHU&amp;video_target=tpm-plugin-76us6s98-5bwD-jhZVHU\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/SellOrProcessFurtherDecision_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Sell or Process Further Decision&#8221; here (opens in new window)<\/a>.<\/p>\n<p>Now check your understanding of how to decide when to sell a product and when to keep processing it further.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm220638\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=220638&theme=oea&iframe_resize_id=ohm220638\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-231\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Sell or Process Further. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Sell or Process Further Decision. <strong>Provided by<\/strong>: Edspira. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/5bwD-jhZVHU\">https:\/\/youtu.be\/5bwD-jhZVHU<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":19,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Sell or Process Further\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Sell or Process Further Decision\",\"author\":\"\",\"organization\":\"Edspira\",\"url\":\"https:\/\/youtu.be\/5bwD-jhZVHU\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-231","chapter","type-chapter","status-publish","hentry"],"part":35,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/231","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":6,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/231\/revisions"}],"predecessor-version":[{"id":2216,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/231\/revisions\/2216"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/35"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/231\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=231"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=231"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=231"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=231"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}