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:

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:

ProductAB
Quantity in Units5,00010,000
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 Costs20,000
Increase in Profits Due to Further Processing$5,000

Opportunity Cost Approach:

Sales in Case of Further Processing$50,000
Costs:
Additional Costs20,000
Opportunity Cost of Not Selling at Split-Off25,000
Gain on Further Processing$5,000

Total Project Approach:

Split-Off
Point
Further
Processed
Revenue$25,000$50,000
Costs020,000
Net Revenue$25,000$30,000
Gain from Further Processing$5,000

Written by Irfanullah Jan