Process or sell decision The Troy Company manufactures electronic subcompo¬ nents that can be sold at the end of process A or can be processed further in process B and sold as special parts for a variety of electronic appliances. The en¬ tire output of process A can be sold at a market price of $2 per unit. The output of process B had been sold at a price of $5.50 for the past three years, but the price has recently fallen to $5.10 on most orders.

Based on an analysis of the product markets and costs, Toni Tobin, the vice- president of marketing, thinks that process B output should be dropped whenever its price falls below $4.50 per unit. The total available capacity is interchange¬ able between process A and process B. She recommends that with present prices, all sales should be process B output. Her analysis is summarized below:

Direct materials and direct labor costs are variable. All manufacturing sup- port costs are fixed and allocated to units produced based on hours of capacity. The total hours of capacity available are 600,000. A batch of 60 units re- quires one hour for process A and two hours of additional processing for pro- cess B.

REQUIRED

(a) If the price of process B output for the next year is likely to be $5.10, should all sales be only the output of process B?

(b) What is the lowest acceptable price for process B output to make it as prof- itable as process A output?

(c) Suppose 50% of the manufacturing support costs are variable. Do your an- swers to

(a) and

(b) above change? If so, how?(LO 2, 3)

Transcribed Image Text:

OUTPUT OF PROCESS A Selling price, after deducting relevant selling costs Costs: Direct materials Direct labor Manufacturing support Cost per unit Operating profit OUTPUT OF PROCESS B Selling price, after deducting relevant selling costs Transferred-in variable cost from process A Additional direct materials Direct labor Manufacturing support for additional processing Cost per unit Operating profit $2.00 $1.00 0.20 0.60 1.80 $0.20 $5.10 $1.20 1.50 0.40 1.20 4.30 $0.80