File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
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Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 1 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
[Clip 13] Sell (now) or Process Further (and sell later) Decision
Incremental Analysis Scenarios
 Recall, we said there are five common scenarios in which we can apply incremental analysis principles: o Accept or Reject a Special Order Decision o Make or Buy Decision (Insource or Outsource) o Continue or Discontinue a Business Segment Decision o Sell now or Process Further (and Sell later) Decision o Retain or Replace Decision
Incremental Analysis Cost Factors
 Relevant revenue or cost – is one which differs among the decision alternatives and has characteristics that make it relevant
 Opportunity cost – is the implied cost associated with passing up a benefit of one decision alternative by making an alternate decision
 Sunk cost – is a cost which has been incurred in the past and is not relevant to a future decision
 Direct fixed cost – is a cost which can be directly associated with a product, service, or activity o Direct fixed costs are usually relevant unless they are sunk costs
 Indirect fixed cost – is a fixed cost which cannot be directly associated with a product, service, or activity, and thus is allocated using a set of rules or assumptions o Are usually not relevant to a short-term decision
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 2 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
Sell now or Process Further (and Sell later) Decision
 The fourth scenario we want to study is the “sell now or process further
(and sell later)” decision.
 The basic scenario is one in which we can choose to sell a product at an early point of manufacture, or sell it at a later point of manufacture.
 As long as the incremental costs for processing further are less than the incremental revenue from selling at a later point of manufacture, processing is economical
 This type of decision can be applied to both a single product case and a multiple product case.
 The decision procedure is basically the same in both cases.
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 3 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
[Clip 14] Example 10 - Sell or Process Further - Single Product Case -
Fargo Furniture - Case 1
Example 10. Fargo Furniture Manufacturers – Case 1
Fargo Furniture Manufacturers manufacture and sell unfinished wood furniture to rural customers in North Dakota and Minnesota. The company is considering a plan to offer a particularly fine dinette table with four chairs in a finished form as well.
The unit costs to manufacture a single dinette set in unfinished form includes:
$60 in direct materials, $90 in direct labor, $9 in variable manufacturing overhead, and $10 in fixed manufacturing overhead. An unfinished dinette set sells for $200.
Manufacturing a dinette set in finished form will add unit costs of $20 in direct materials, $50 in direct labor, and $5 in variable manufacturing overhead. The firm has excess capacity sufficient to finish dinette sets as well as to sell them unfinished. Market research shows that the dinette set in finished form can be sold for $300.
Should Fargo Furniture offer some of the dinette sets in a finished form?
(see Appendix 1 for the Solution)
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 4 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
Revenue
Example 10. Fargo Furniture Manufacturers – Case 1
Sell Now or Process Further (and sell later) Decision Worksheet
(compare unit revenue and unit costs approach)
Sell now
(Unfinished dinette)
Process further
(Finished dinette)
Change in
Revenue, Costs, and Net Income
Variable Costs:
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
Net Income
Revenue
Example 10. Fargo Furniture Manufacturers – Case 1
Sell Now or Process Further (and sell later) Decision Worksheet
(alternate incremental revenue and incremental costs approach)
Sell now
(Unfinished dinette)
Process further
(Finished dinette)
Change in
Revenue, Costs, and Net Income
Variable Costs:
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
Net Income
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 5 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
[Clip 15] Example 11 - Sell or Process Further - Single Product Case -
Fargo Furniture - Case 2
Example 11. Fargo Furniture Manufacturers – Case 2
Suppose Fargo currently sells 20,000 dinette sets annually in unfinished form for
$200. Manufacturing costs are as follows:
Total direct materials cost of $1,200,000 ($60 per unit)
Total direct labor cost of $1,800,000 ($90 per unit)
Total variable manufacturing overhead cost of $ 180,000 ($9 per unit)
Total fixed manufacturing overhead cost of $ 200,000 ($10 per unit)
Manufacturing a dinette set in finished form will add unit costs of $20 in direct materials, $50 in direct labor, and $5 in variable manufacturing overhead. The firm has excess capacity sufficient to finish dinette sets as well as to sell them unfinished. Market research shows that 5,000 dinette sets in finished form can be sold annually for $300, but this would reduce sales of unfinished dinettes to
15,000 units annually.
Should Fargo Furniture offer some of the dinette sets in a finished form?
(see Appendix 1 for the Solution)
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 6 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
Revenue
Example 11. Fargo Furniture Manufacturers – Case 2
Sell Now or Process Further (and sell later) Decision Worksheet
(compare total revenue and total costs approach)
Sell now
(Unfinished dinette)
Process further
(Finished dinette)
Change in
Revenue, Costs, and Net Income
Variable Costs:
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
Net Income
Revenue
Example 11. Fargo Furniture Manufacturers – Case 2
Sell Now or Process Further (and sell later) Decision Worksheet
(alternate incremental revenue and incremental costs approach)
Sell now
(Unfinished dinette)
Process further
(Finished dinette)
Change in
Revenue, Costs, and Net Income
Variable Costs:
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
Net Income
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 7 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
[Clip 16] Example 12 - Sell or Process Further - Single Product Case -
Fargo Furniture - Case 3
Example 12. Fargo Furniture Manufacturers – Case 3
Suppose the facts in case 2 continue to be true, except, in order to provide adequate space for the finishing process, the firm must expand capacity by leasing more space at an additional cost of $150,000 annually.
Review of the Facts:
Sell now
Selling Price
Unit Variable Costs:
$200
Increase if Processed
Further
+ $100
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
$60
$90
$9
$200,000
+ $20
+ $50
+ $5
+ $150,000
Should Fargo Furniture offer some of the dinette sets in a finished form?
(see Appendix 1 for the Solution)
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 8 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
Revenue
Example 12. Fargo Furniture Manufacturers – Case 3
Sell Now or Process Further (and sell later) Decision Worksheet
(alternate incremental revenue and incremental costs approach)
Sell now
(Unfinished dinette)
Process further
(Finished dinette)
Change in
Revenue, Costs, and Net Income
Variable Costs:
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
Net Income
Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 9 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
APPENDIX 1 – SOLUTIONS
[Clip 14] Example 10 - Sell or Process Further - Single Product Case - Fargo Furniture - Case 1
SOLUTION:

Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 10 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24

File: FA-20-060-04a-Workbook.pdf
Title: Managerial Accounting – Incremental Analysis – Sell or Process Further
[Clip 15] Example 11 - Sell or Process Further - Single Product Case - Fargo Furniture - Case 2
SOLUTION:

[Clip 16] Example 12 - Sell or Process Further - Single Product Case - Fargo Furniture - Case 3
SOLUTION:

Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 11 of 11 videos for this lesson are available at evideolearner.com Revised: 2011-05-24