Question

Sheffield Corp. spent $6400 to produce Product 89, which can be sold as is for $9000, or processed further incurring additional costs of $2400 and then be sold for $13000. Which amounts are relevant to the decision about Product 89?

Answer 1

Answer:

Relevant decision amounts are $9,000, $3,000 and $13,000.

Explanation:

The information which is relevant for the Product 89 is:

Sale value of the product now is $9,000

If processed further, the cost would be $3,000

Sale value after processing is $13,000

Amount $6,400 which is already spent is irrelevant for the decision as it is a sunk cost which cannot be recovered. Whether product is processed further or not, it is not going to impact the profit or loss.

Therefore, processing further will provide extra profit of $1,000  [(13,000 - 9,000) - 3,000].

Hence, it should be processed further.