Example Exercise 25 5 Product K is produced for 155 per poun

Example Exercise 25 -5 Product K is produced for $155 per pound. Product K can be sold without additional processing for $220 per pound or processed further into Product L at an additional cost of $28 per pound. Product L can be sold for $250 per pound. Prepare a differential analysis dated November 15 on whether to sell Product K (Alternative 1) or process further into Product L (Alternative 2). Show How

Solution

Differential analysis on November\'15 Alternative 1 Alternative 2 Differential amount Particulars Product K Product L (Further processed) Sales revenue 220 250 30 Less :Variable cost 155 155 0 Less :Additional cost for further processing 0 28 28 0 Contribution margin 65 67 2 From the above computation , we can clearly suggest that product K should be furtherly processed into product L Beacause of higher revenue and higher margin when compared to product K