Question

Chino Company manufactures fabric and clothing. Managers can either sell the unfinished fabric to other clothing manufacturers or incur additional conversion costs to create a finished garment. The costs incurred to produce the unfinished fabric are $400,000, which are allocated to the products based on the sales value of the unfinished fabric. Following is information concerning the clothing that can be produced from the fabric: Product Pants Shirts Coats Number of Units 6,000 12,000 4,000 Selling Price of Unfinished Fabric $20.00 23.20 38.80 Selling Price after Processing Further $30.00 32.40 43.20 Additional Processing Cost $28,450 64,400 18,300 Required: 2-a. Calculate the increase or decrease in profit if the products are processed further. 2-b. Which products should be sold as unfinished fabric and which should be further processed? 3. Assume that the $400,000 in costs is allocated based on the number of units of output. Which products should be sold as unfinished fabric and which should be further processed?

Answer 1

Answer is given below

Working notes: Incremental profit Selling price after further process $30.00 $32.40 $43.20 selling price of Difference unfinished in selling fabric price $20.00 $10.00 $23.20 $9.20 | $38.80 $4.40 Further Incremental Units processing Contribution cost 6,000 $60,000 $28,450 12,000 $110,400 $64,400 4,000 $17,600 $18,300 FEE Pants Shirts $31,550 $46,000 -$700 Coats | 2-a Pants Shirts Coats Profit $31,550 $46,000 -$700 2-5 Pants Shirts Coats further process further process sell as unfinished fabric Pants Shirts Coats further or further process further process sell as unfinished fabric The answer remains the same. Joint cost is not relevant for deciding if further processing decision should be taken or not Analysis is based on Incremental revenue and increment cost to further process only