Differential Analysis: The Key to

Decision Making
Chapter 12

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 12-2

Introduction
• Making decisions is one of the basic functions of
a manager.
• To be successful in decision-making, managers
must be able to tell the difference between
relevant and irrelevant data and must be able to
correctly use the relevant data in analyzing
alternatives.
• The purpose of this chapter is to develop
these skills by illustrating their use in a wide
range of decision-making situations.
 12-3

Learning Objective 1

Identify relevant and

irrelevant costs and
benefits in a decision.
 12-4

Relevant Costs and Benefits

A relevant cost is a cost that differs

between alternatives.

A relevant benefit is a benefit that

differs between alternatives.
 12-5

Identifying Relevant Costs

An avoidable cost is a cost that can be
eliminated, in whole or in part, by
choosing one alternative over another.
Avoidable costs are relevant costs.
Unavoidable costs are irrelevant costs.

Two broad categories of costs are never

relevant in any decision. They include:
A sunk cost is a cost that has already been
incurred and cannot be avoided regardless
of what a manager decides to do.
A future cost that does not differ between
alternatives is never relevant in a decision.
 12-6

Decision Making: A Two-Step Process

Step 1 Eliminate costs and benefits that do not differ

between alternatives.
Step 2 Use the remaining costs and benefits that
differ between alternatives in making the
decision. The costs that remain are the
differential, or avoidable, costs.
 12-7

Different Costs for Different Purposes

Costs that are
relevant in one
decision situation
may not be relevant
in another context.
Thus, in each
decision situation,
the manager must
examine the data at
hand and isolate the
relevant costs.
 12-8

Total and Differential Cost Approaches

The management of a company is considering a new labor saving
machine that rents for $3,000 per year. Data about the company’s
annual sales and costs with and without the new machine are:
Situation Differential
Current With New Costs and
Situation Machine Benefits
Sales (5,000 units @ $40 per unit) $ 200,000 $ 200,000 -
Less variable expenses:
Direct materials (5,000 units @ $14 per unit) 70,000 70,000 -
Direct labor (5,000 units @ $8 and $5 per unit) 40,000 25,000 15,000
Variable overhead (5,000 units @ $2 per unit) 10,000 10,000 -
Total variable expenses 120,000 105,000 -
Contribution margin 80,000 95,000 15,000
Less fixed expense:
Other 62,000 62,000 -
Rent on new machine - 3,000 (3,000)
Total fixed expenses 62,000 65,000 (3,000)
Net operating income $ 18,000 $ 30,000 12,000
 12-9

Total and Differential Cost Approaches

As you can see, the only costs that differ between the
alternatives are the direct labor costs savings and the
increase in fixed rental costs.
Situation Differential
Current With New Costs and
Situation Machine Benefits
Sales (5,000 units @ $40 per unit) $ 200,000 $ 200,000 -
Less variable expenses:
Direct materialsWe canunits
(5,000 efficiently analyze the
@ $14 per unit) decision 70,000
70,000 by -
Direct labor looking
(5,000 units at
@ $8 anddifferent
the $5 per unit) costs 40,000
and revenues 25,000 15,000
Variable overhead (5,000 units @ $2 per unit) 10,000 10,000 -
Total variable expenses and arrive at the same solution
120,000 . 105,000 -
Contribution margin 80,000 95,000 15,000
Less fixed expense:Net Advantage to Renting the New Machine
Decrease in direct labor costs (5,000 units @ $3 per unit) $ 15,000
Other 62,000 62,000 -
Increase in fixed rental expenses (3,000)
Rent on newNet machine
annual cost saving from renting the new machine
- $
3,000
12,000
(3,000)
Total fixed expenses 62,000 65,000 (3,000)
Net operating income $ 18,000 $ 30,000 12,000
 12-10

Learning Objective 2

Prepare an analysis
showing whether a
product line or other
business segment should
be added or dropped.
 12-11

Adding/Dropping Segments
One of the most important
decisions managers
make is whether to add
or drop a business
segment. Ultimately, a
decision to drop an old
segment or add a new
one is going to hinge To assess this
primarily on the impact impact, it is
the decision will have on necessary to
net operating income. carefully analyze
the costs.
 12-12

Adding/Dropping Segments

Due to the declining popularity of

digital watches, Lovell Company’s
digital watch line has not reported
a profit for several years. Lovell is
considering discontinuing this
product line.
 12-13

A Contribution Margin Approach

DECISION RULE
Lovell should drop the digital watch
segment only if its profit would
decrease.

Lovell will compare the contribution

margin that would be lost to the
costs that would be avoided if the
line was to be dropped.
 12-14

Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
Variable manufacturing costs $ 120,000
Variable shipping costs 5,000
Commissions 75,000 200,000
Contribution margin $ 300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Depreciation of equipment 50,000
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000 400,000
Net operating loss $ (100,000)
 12-15

Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
An
Less: investigation
variable expenses has revealed that the fixed
Variable
general manufacturing costs and
factory overhead $ 120,000
fixed general
Variable shipping costs 5,000
administrative
Commissions
expenses will not be affected200,000
75,000
by
dropping the
Contribution digital watch line. The fixed general
margin $ 300,000
factory
Less: overhead and general administrative
fixed expenses
General factory overhead $ 60,000
expenses assigned to this product would be
Salary of line manager 90,000
reallocated
Depreciation to other product
of equipment lines.
50,000
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000 400,000
Net operating loss $ (100,000)
 12-16

Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales $ 500,000
Less: variable expenses
The equipment used to manufacture
Variable manufacturing costs $ 120,000
digital
Variable watches
shipping has no resale5,000
costs
value or alternative use. 75,000
Commissions 200,000
Contribution margin $ 300,000
Less: fixed expenses
General factory overhead $ 60,000
Salary of line manager 90,000
Should Lovell
Depreciation of equipment retain or drop
50,000
Advertising - direct the digital watch
100,000segment?
Rent - factory space 70,000
General admin. expenses 30,000 400,000
Net operating loss $ (100,000)
 12-17

A Contribution Margin Approach

Contribution Margin
Solution
Contribution margin lost if digital
watches are dropped $ (300,000)
Less fixed costs that can be avoided
Salary of the line manager $ 90,000
Advertising - direct 100,000
Rent - factory space 70,000 260,000
Net disadvantage $ (40,000)
 12-18

Comparative Income Approach

The Lovell solution can also be obtained

by preparing comparative income
statements showing results with and
without the digital watch segment.

Let’s look at this second approach.

 12-19

Comparative Income Approach

Solution
Keep Drop
Digital Digital
Watches Watches Difference
Sales $ 500,000 $ - $ (500,000)
Less variable expenses: -
Manufacturing expenses 120,000 - 120,000
Shipping 5,000 - 5,000
Commissions 75,000 - 75,000
Total variable expenses 200,000 - 200,000
Contribution margin 300,000 - (300,000)
Less fixed expenses:
General factory overhead 60,000
Salary of line manager 90,000
Depreciation 50,000 If the digital watch
Advertising - direct 100,000
Rent - factory space 70,000
line is dropped, the
General admin. expenses 30,000 company loses
Total fixed expenses 400,000 $300,000 in
Net operating loss $ (100,000)
contribution margin.
 12-20

Comparative Income Approach

Solution
Keep Drop
Digital Digital
Watches Watches Difference
Sales $ 500,000 $ - $ (500,000)
Less variable expenses: -
Manufacturing expenses 120,000 - 120,000
Shipping 5,000 - 5,000
Commissions 75,000 - 75,000
Total variable expenses 200,000 - 200,000
Contribution margin 300,000 - (300,000)
Less fixed expenses:
General factory overhead 60,000 60,000 -
Salary of line manager 90,000
Depreciation 50,000
Advertising - direct On the
100,000other hand, the general
Rent - factory space factory overhead would be the
70,000
General admin. expenses 30,000
same under both alternatives,
Total fixed expenses 400,000
Net operating loss so it is irrelevant.
$ (100,000)
 12-21

Comparative Income Approach

Solution
Keep Drop
Digital Digital
Watches Watches Difference
Sales $ 500,000 $ - $ (500,000)
Less variable expenses: -
Manufacturing expenses
The salary of the
120,000
product -
line 120,000
Shipping manager would 5,000disappear, - so 5,000
Commissions it is relevant to the decision.
75,000 - 75,000
Total variable expenses 200,000 - 200,000
Contribution margin 300,000 - (300,000)
Less fixed expenses:
General factory overhead 60,000 60,000 -
Salary of line manager 90,000 - 90,000
Depreciation 50,000
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000
Total fixed expenses 400,000
Net operating loss $ (100,000)
 12-22

Comparative Income Approach

Solution
Keep Drop
Digital Digital
Watches Watches Difference
Sales $ 500,000 $ - $ (500,000)
The
Less depreciation
variable expenses: is a sunk cost. Also, remember - that
Manufacturing
the equipment expenses
has no resale120,000 -
value or alternative 120,000
use,
Shipping 5,000 - 5,000
so the equipment and the 75,000
Commissions depreciation expense
- 75,000
associated
Total variable with it are irrelevant
expenses 200,000 to the decision.
- 200,000
Contribution margin 300,000 - (300,000)
Less fixed expenses:
General factory overhead 60,000 60,000 -
Salary of line manager 90,000 - 90,000
Depreciation 50,000 50,000 -
Advertising - direct 100,000
Rent - factory space 70,000
General admin. expenses 30,000
Total fixed expenses 400,000
Net operating loss $ (100,000)
 12-23

Comparative Income Approach

Solution
Keep Drop
Digital Digital
Watches Watches Difference
Sales $ 500,000 $ - $ (500,000)
Less variable expenses: -
Manufacturing expenses 120,000 - 120,000
Shipping The complete 5,000 comparative- 5,000
Commissions income statements
75,000 reveal- that 75,000
Total variable expenses 200,000 - 200,000
Contribution margin
Lovell would
300,000
earn $40,000
-
of (300,000)
Less fixed expenses: additional profit by retaining the
General factory overhead 60,000
digital 60,000
watch line. -
Salary of line manager 90,000 - 90,000
Depreciation 50,000 50,000 -
Advertising - direct 100,000 - 100,000
Rent - factory space 70,000 - 70,000
General admin. expenses 30,000 30,000 -
Total fixed expenses 400,000 140,000 260,000
Net operating loss $ (100,000) $ (140,000) $ (40,000)
 12-24

Beware of Allocated Fixed Costs

Why should we keep the
digital watch segment
when it’s showing a
$100,000 loss?
 12-25

Beware of Allocated Fixed Costs

The answer lies in the

way we allocate
common fixed costs
to our products.
 12-26

Beware of Allocated Fixed Costs

Including unavoidable Our allocations can

common fixed costs make a segment
makes the product line look less profitable
appear to be unprofitable. than it really is.
 12-27

Learning Objective 3

Prepare a make or buy

analysis.
 12-28

The Make or Buy Decision

When a company is involved in more than
one activity in the entire value chain, it is
vertically integrated. A decision to carry
out one of the activities in the value chain
internally, rather than to buy externally
from a supplier is called a “make or buy”
decision.
 12-29

Vertical Integration- Advantages

Smoother flow of
parts and materials

Better quality
control

Realize profits
 12-30

Vertical Integration- Disadvantage

Companies may fail to
take advantage of
suppliers who can
create economies of
scale advantage by
pooling demand from
numerous companies.

While the economics of scale factor can be

appealing, a company must be careful to retain
control over activities that are essential to
maintaining its competitive position.
 12-31

The Make or Buy Decision: An Example

Essex Company manufactures part 4A that is used
in one of its products. The unit product cost of this
part is:

Direct materials $ 9
Direct labor 5
Variable overhead 1
Depreciation of special equip. 3
Supervisor's salary 2
General factory overhead 10
Unit product cost $ 30
 12-32

The Make or Buy Decision

• The special equipment used to manufacture part
4A has no resale value.
• The total amount of general factory overhead,
which is allocated on the basis of direct labor
hours, would be unaffected by this decision.
• The $30 unit product cost is based on 20,000
parts produced each year.
• An outside supplier has offered to provide the
20,000 parts at a cost of $25 per part.

Should we accept the supplier’s offer?

 12-33

The Make or Buy Decision

Cost
Per
Unit Cost of 20,000 Units
Make Buy
Outside purchase price $ 25 $ 500,000

Direct materials (20,000 units) $ 9 180,000

Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 -
Total cost $ 30 $ 340,000 $ 500,000

The avoidable costs associated with making part 4A include direct

materials, direct labor, variable overhead, and the supervisor’s salary.
 12-34

The Make or Buy Decision

Cost
Per
Unit Cost of 20,000 Units
Make Buy
Outside purchase price $ 25 $ 500,000

Direct materials (20,000 units) $ 9 180,000

Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 -
Total cost $ 30 $ 340,000 $ 500,000

The depreciation of the special equipment represents a sunk

cost. The equipment has no resale value, thus its cost and
associated depreciation are irrelevant to the decision.
 12-35

The Make or Buy Decision

Cost
Per
Unit Cost of 20,000 Units
Make Buy
Outside purchase price $ 25 $ 500,000

Direct materials (20,000 units) $ 9 180,000

Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 -
Total cost $ 30 $ 340,000 $ 500,000

Not avoidable; irrelevant. If the product is

dropped, it will be reallocated to other products.
 12-36

The Make or Buy Decision

Cost
Per
Unit Cost of 20,000 Units
Make Buy
Outside purchase price $ 25 $ 500,000

Direct materials (20,000 units) $ 9 180,000

Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 -
Total cost $ 30 $ 340,000 $ 500,000

Should we make or buy part 4A?

Given that the total avoidable costs are less than the cost of
buying the part, Essex should continue to make the part.
 12-37

Opportunity Cost
An opportunity cost is the benefit that is
foregone as a result of pursuing some
course of action.
Opportunity costs are not actual cash
outlays and are not recorded in the
formal accounts of an organization.

How would this concept potentially relate

to the Essex Company?
 12-38

Learning Objective 4

Prepare an analysis
showing whether a
special order should be
accepted.
 12-39

Key Terms and Concepts

A special order is a one-time
order that is not considered
part of the company’s normal
ongoing business.

When analyzing a special

order, only the incremental
costs and benefits are
relevant.
Since the existing fixed
manufacturing overhead costs
would not be affected by the
order, they are not relevant.
 12-40

Special Orders
➢Jet, Inc. makes a single product whose normal
selling price is $20 per unit.
➢A foreign distributor offers to purchase 3,000
units for $10 per unit.
➢This is a one-time order that would not affect the
company’s regular business.
➢Annual capacity is 10,000 units, but Jet, Inc. is
currently producing and selling only 5,000 units.

Should Jet accept the offer?

 12-41

Special Orders
Jet, Inc.
Contribution Income Statement
Revenue (5,000 × $20) $ 100,000
Variable costs:
Direct materials $ 20,000
Direct labor 5,000
Manufacturing overhead 10,000 $8 variable cost
Marketing costs 5,000
Total variable costs 40,000
Contribution margin 60,000
Fixed costs:
Manufacturing overhead $ 28,000
Marketing costs 20,000
Total fixed costs 48,000
Net operating income $ 12,000
 12-42

Special Orders
If Jet accepts the special order, the incremental
revenue will exceed the incremental costs. In
other words, net operating income will increase
by $6,000. This suggests that Jet should accept
the order.

Increase in revenue (3,000 × $10) $ 30,000

Increase in costs (3,000 × $8 variable cost) 24,000
Increase in net income $ 6,000

Note: This answer assumes that the fixed costs are

unavoidable and that variable marketing costs must be
incurred on the special order.
 12-43

Quick Check ✓
Northern Optical ordinarily sells the X-lens for
$50. The variable production cost is $10, the
fixed production cost is $18 per unit, and the
variable selling cost is $1. A customer has
requested a special order for 10,000 units of the
X-lens to be imprinted with the customer’s logo.
This special order would not involve any selling
costs, but Northern Optical would have to
purchase an imprinting machine for $50,000.
(see the next page)
 12-44

Quick Check ✓
What is the rock bottom minimum price below
which Northern Optical should not go in its
negotiations with the customer? In other words,
below what price would Northern Optical
actually be losing money on the sale? There is
ample idle capacity to fulfill the order and the
imprinting machine has no further use after this
order.
a. $50
b. $10
c. $15
d. $29
 12-45

Quick Check ✓
What is the rock bottom minimum price below
which Northern Optical should not go in its
negotiations with the customer? In other words,
below what price would Northern Optical
actually be losing money on the sale? There is
ample idle capacity to fulfill the order and the
imprinting machine
Variable has no further
production costuse$100,000
after this
order. Additional fixed cost + 50,000
a. $50 Total relevant cost $150,000
b. $10 Number of units 10,000
c. $15 Average cost per unit= $15
d. $29
 12-46

Learning Objective 5

Determine the most

profitable use of a
constrained resource.
 12-47

Key Terms and Concepts

When a limited resource of
some type restricts the
company’s ability to satisfy
demand, the company is
said to have a constraint.

The machine or
process that is
limiting overall output
is called the
bottleneck – it is the
constraint.
 12-48

Utilization of a Constrained Resource

• Fixed costs are usually unaffected in these
situations, so the product mix that maximizes
the company’s total contribution margin should
ordinarily be selected.
• A company should not necessarily promote those
products that have the highest unit contribution
margins.
• Rather, total contribution margin will be
maximized by promoting those products or
accepting those orders that provide the highest
contribution margin in relation to the
constraining resource.
 12-49

Utilization of a Constrained Resource:

An Example
Ensign Company produces two products and
selected data are shown below:
Product
1 2
Selling price per unit $ 60 $ 50
Less variable expenses per unit 36 35
Contribution margin per unit $ 24 $ 15
Current demand per week (units) 2,000 2,200
Contribution margin ratio 40% 30%
Processing time required
on machine A1 per unit 1.00 min. 0.50 min.
 12-50

Utilization of a Constrained Resource:

An Example
• Machine A1 is the constrained resource
and is being used at 100% of its capacity.
• There is excess capacity on all other
machines.
• Machine A1 has a capacity of 2,400
minutes per week.

Should Ensign focus its efforts on

Product 1 or Product 2?
 12-51

Quick Check ✓
How many units of each product can be
processed through Machine A1 in one
minute?

Product 1 Product 2
a. 1 unit 0.5 unit
b. 1 unit 2.0 units
c. 2 units 1.0 unit
d. 2 units 0.5 unit
 12-52

Quick Check ✓
How many units of each product can be
processed through Machine A1 in one minute?

Product 1 Product 2
a. 1 unit 0.5 unit
b. 1 unit 2.0 units
c. 2 units 1.0 unit
d. 2 units 0.5 unit
Just checking to make sure you are with us.
 12-53

Quick Check ✓
What generates more profit for the company,
using one minute of machine A1 to process
Product 1 or using one minute of machine A1 to
process Product 2?
a. Product 1
b. Product 2
c. They both would generate the same profit.
d. Cannot be determined.
 12-54

Quick Check ✓
What generates more profit for the company,
using one minute of machine A1 to process
Product 1 or using one minute of machine A1 to
process Product 2?
a. Product 1
b. Product 2
c. They
With both would generate
one minute of machinetheA1,
same profit.
Ensign could
d. Cannot
make 1be determined.
unit of Product 1, with a contribution
margin of $24, or 2 units of Product 2, each with a
contribution margin of $15 per unit.
2 × $15 = $30 > $24
 12-55

Utilization of a Constrained Resource

The key is the contribution margin per unit of the
constrained resource.
Product
1 2
Contribution margin per unit $ 24 $ 15
Time required to produce one unit ÷ 1.00 min. ÷ 0.50 min.
Contribution margin per minute $ 24 $ 30

Ensign should emphasize Product 2 because it

generates a contribution margin of $30 per minute
of the constrained resource relative to $24 per
minute for Product 1.
 12-56

Utilization of a Constrained Resource

The key is the contribution margin per unit of the
constrained resource.
Product
1 2
Contribution margin per unit $ 24 $ 15
Time required to produce one unit ÷ 1.00 min. ÷ 0.50 min.
Contribution margin per minute $ 24 $ 30

Ensign can maximize its contribution margin

by first producing Product 2 to meet customer
demand and then using any remaining
capacity to produce Product 1. The
calculations would be performed as follows.
 12-57

Utilization of a Constrained Resource

Let’s see how this plan would work.
Alloting Our Constrained Resource (Machine A1)

Weekly demand for Product 2 2,200 units

Time required per unit × 0.50 min.
Total time required to make
Product 2 1,100 min.
 12-58

Utilization of a Constrained Resource

Let’s see how this plan would work.
Alloting Our Constrained Resource (Machine A1)

Weekly demand for Product 2 2,200 units

Time required per unit × 0.50 min.
Total time required to make
Product 2 1,100 min.

Total time available 2,400 min.

Time used to make Product 2 1,100 min.
Time available for Product 1 1,300 min.
 12-59

Utilization of a Constrained Resource

Let’s see how this plan would work.
Alloting Our Constrained Resource (Machine A1)

Weekly demand for Product 2 2,200 units

Time required per unit × 0.50 min.
Total time required to make
Product 2 1,100 min.

Total time available 2,400 min.

Time used to make Product 2 1,100 min.
Time available for Product 1 1,300 min.
Time required per unit ÷ 1.00 min.
Production of Product 1 1,300 units
 12-60

Utilization of a Constrained Resource

According to the plan, we will produce
2,200 units of Product 2 and 1,300 of
Product 1. Our contribution margin looks
like this.

Product 1 Product 2
Production and sales (units) 1,300 2,200
Contribution margin per unit $ 24 $ 15
Total contribution margin $ 31,200 $ 33,000

The total contribution margin for Ensign is $64,200.

 12-61

Learning Objective 6

Prepare an analysis
showing whether joint
products should be sold
at the split-off point or
processed further.
 12-62

Joint Costs
• In some industries, a number of end
products are produced from a single raw
material input.
• Two or more products produced from a
common input are called joint products.
• The point in the manufacturing process
where each joint product can be
recognized as a separate product is called
the split-off point.
 12-63

Joint Products
For example,
Oil in the petroleum
refining industry,
a large number
Common of products are
Joint
Input
Production Gasoline extracted from
Process crude oil,
including
gasoline, jet fuel,
Chemicals
home heating oil,
lubricants,
asphalt, and
Split-Off
various organic
Point chemicals.
 12-64

Joint Products
Joint costs
are incurred
up to the Separate Final
Oil
split-off point Processing Sale

Common
Joint Final
Production Gasoline
Input Sale
Process

Separate Final
Chemicals
Processing
Sale

Split-Off Separate
Point Product
Costs
 12-65

The Pitfalls of Allocation

Joint costs are traditionally
allocated among different
products at the split-off point.
A typical approach is to allocate
joint costs according to the
relative sales value of the end
products.
Although allocation is needed for
some purposes such as balance
sheet inventory valuation,
allocations of this kind are very
dangerous for decision making.
 12-66

Sell or Process Further

Joint costs are irrelevant in decisions regarding
what to do with a product from the split-off point
forward. Therefore, these costs should not be
allocated to end products for decision-making
purposes.

With respect to sell or process further decisions, it is

profitable to continue processing a joint product
after the split-off point so long as the incremental
revenue from such processing exceeds the
incremental processing costs incurred after the
split-off point.
 12-67

Sell or Process Further: An Example

• Sawmill, Inc. cuts logs from which unfinished
lumber and sawdust are the immediate joint
products.
• Unfinished lumber is sold “as is” or processed
further into finished lumber.
• Sawdust can also be sold “as is” to gardening
wholesalers or processed further into “presto-
logs.”
 12-68

Sell or Process Further

Data about Sawmill’s joint products includes:
Per Log
Lumber Sawdust
Sales value at the split-off point $ 140 $ 40

Sales value after further processing 270 50

Allocated joint product costs 176 24
Cost of further processing 50 20
 12-69

Sell or Process Further

Analysis of Sell or Process Further
Per Log
Lumber Sawdust

Sales value after further processing $ 270 $ 50

Sales value at the split-off point 140 40
Incremental revenue 130 10
Cost of further processing
Profit (loss) from further processing
 12-70

Sell or Process Further

Analysis of Sell or Process Further
Per Log
Lumber Sawdust

Sales value after further processing $ 270 $ 50

Sales value at the split-off point 140 40
Incremental revenue 130 10
Cost of further processing 50 20
Profit (loss) from further processing $ 80 $ (10)
 12-71

Sell or Process Further

Analysis of Sell or Process Further
Per Log
Lumber Sawdust

Sales value after further processing $ 270 $ 50

Sales value at the split-off point 140 40
Incremental revenue 130 10
Cost of further processing 50 20
Profit (loss) from further processing $ 80 $ (10)

The lumber should be processed

further and the sawdust should be
sold at the split-off point.
 12-72

End of Chapter 12

• Exercise 12-1 (Identifying Relevant Costs)

• Exercise 12-3 (Make or Buy a Component)
• Exercise 12-4 (Evaluating a Special Order)
• Exercise 12-5 (Utilizing a Constrained Resource)
• Exercise 12-7 (Sell or Process Further)
• Exercise 12-10 (Dropping or Retaining a Segment)

Submit Date: 27 December 2022