1. @ 2012, Cengage Learning Differential Analysis, Product Pricing, and Activity-Based Costing LO 1d – Deciding Whether to Process or Sell Further or Accept Special Priced Business

2. Process or Sell  In some cases, a product can be sold at an intermediate stage of production, or it can be processed further and then sold. LO 1

3. A business produces kerosene as follows: Batch size4,000gallons Cost of producing kerosene$2,400per batch Selling price$2.50per gallon Process or Sell LO 1 (continued)

4. The kerosene can be processed further to yield gasoline as follows: Input batch size4,000gallons Less evaporation (20%) 800(4,000 x 20%) Output batch size3,200 Cost of producing gasoline$3,050per batch Selling price$3.50per gallon (continued) Process or Sell LO 1

5. Process or Sell LO 1 process further

6.  The differential income from further processing kerosene into gasoline is $550 per batch. The initial cost of producing the intermediate kerosene, $2,400, is not considered in deciding whether to process the kerosene further. Process or Sell

7. Accept Business at a Special Price LO 1  The differential costs of accepting additional business depend on whether the company is operating at full capacity.  If the company is operating at full capacity, any additional production increases fixed and variable manufacturing costs.  If the company is operating below full capacity, any additional production does not increase fixed manufacturing costs.

8. Accept Business at a Special Price LO 1 B-Ball Inc. manufactures basketballs as follows: Monthly productive capacity12,500basketballs Current monthly sales10,000basketballs Normal (domestic) selling price$30.00per basketball Manufacturing costs: Variable costs$12.50 per basketball Fixed costs 7.50 Total$20.00per basketball (continued)

9. Accept Business at a Special Price LO 1 On March 10, 2012, B-Ball Inc. receives an offer from an exporter for 5,000 basketballs at $18 each. Production can be spread over three months, so these basketballs can be manufactured using normal capacity. The domestic market will not be affected. (continued)

10. Accept Business at a Special Price LO 1

11.  There are other considerations in making the decision to sell in the domestic market at lower than normal prices. It may be unwise to increase sales volume in one territory by price reduction if sales volume is lost in other areas. Also, manufacturers must be careful not to practice price discrimination as defined by the Robinson-Patman Act. Accept Business at a Special Price