# Sell-or-Process-Further Decision

A decision whether to sell a joint product at split-off point or to process it further and sell it in a more refined form is called a sell-or-process-further decision. Joint products are two or more products which have been manufactured from the same inputs and in a same production process (i.e. a joint process). The point at which joint products leave the joint process is called split-off point.

Some of the joint products may be in final form ready for sale, while others may be processed further. In such cases managers have to decide whether to sell the unfinished goods at split-off point or to process them further. Such decision is known as sell-or-process-further decision and it must be made so as to maximize the profits of the business.

A sell-or-process-further analysis can be carried out in three different ways:

• Incremental (or Differential) Approach calculates the difference between the additional revenues and the additional costs of further processing. If the difference is positive the product must be processed further, otherwise not.
• Opportunity Cost Approach calculates the difference between net revenue from further processed product and the opportunity cost of not selling the product at split-off point. If the difference is positive, further processing will increase profits.
• Total Project Approach (or the comparative statement approach) compares the profit statements of both options (i.e. selling or further processing) separately for each product. The option generating higher profit is chosen.

The following example illustrates the approaches to a sell-or-process-further decision:

## Example

Product A and B are produced in a joint process. At split-off point, Product A is complete whereas product B can be process further. The following additional information is available:

 Product A B Quantity in Units 5,000 10,000 Selling Price Per Unit: At Split-Off $10$2.5 If Processed Further $5 Costs After Split-Off$20,000

Perform sell-or-process-further analysis for product B.

Solution

Incremental Approach:

 Incremental Revenue $25,000 Incremental Costs 20,000 Increase in Profits Due to Further Processing$5,000

Opportunity Cost Approach:

 Sales in Case of Further Processing $50,000 Costs: Additional Costs 20,000 Opportunity Cost of Not Selling at Split-Off 25,000 Gain on Further Processing$5,000

Total Project Approach:

 Split-OffPoint FurtherProcessed Revenue $25,000$50,000 Costs 0 20,000 Net Revenue $25,000$30,000 Gain from Further Processing \$5,000

Written by Irfanullah Jan