Sell or process further decision
/What is the Sell or Process Further Decision?
The sell or process further decision is the choice of selling a product now or processing it further to earn additional revenue. This choice is based on an incremental analysis of whether the additional revenues to be gained will exceed the additional costs to be incurred as part of the additional processing work. For example, if a green widget can be converted into a red widget at an incremental cost of $1.00 per unit, then processing further is a good idea as long as the incremental price gain to be achieved is at least $1.01 per unit.
The sell or process further decision most commonly arises when two or more products are generated by a manufacturing process. At the point when the products can be split apart (the split-off point), there is a choice to sell the goods immediately or attempt to capture additional value by engaging in more processing. This decision may vary over time, based on changes in the market prices of a product at each stage of processing. If the market price declines for a later-stage product, it can make more sense to sell it without additional processing. Conversely, if the market price increases for a later-stage product, the better choice may be to continue with additional processing in order to reap higher profits.
Another factor in the sell or process further decision is when the additional processing time is substantial. If so, and market prices are volatile, there is a risk that the market price will decline by the time your additional processing has been completed. In this situation, it can make sense to sell now.
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FAQs
How do capacity constraints influence the decision?
If further processing consumes limited machine hours, labor, or production space, management must evaluate the contribution margin per constrained resource. Processing further is justified only if the incremental margin generated per unit of scarce capacity exceeds the margin available from alternative uses of that capacity. Otherwise, selling at split-off may maximize overall profitability.