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:
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:
|Quantity in Units||5,000||10,000|
|Selling Price Per Unit:|
|If Processed Further||$5|
|Costs After Split-Off||$20,000|
Perform sell-or-process-further analysis for product B.
|Increase in Profits Due to Further Processing||$5,000|
Opportunity Cost Approach:
|Sales in Case of Further Processing||$50,000|
|Opportunity Cost of Not Selling at Split-Off||25,000|
|Gain on Further Processing||$5,000|
Total Project Approach:
|Gain from Further Processing||$5,000|
Written by Irfanullah Jan