Making Profitable Decisions on Further Processing
Explore decision-making processes for maximizing profit through further processing of products, with examples and calculations for mango farming and joint products.
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Presentation Transcript
FURTHER PROCESSING DECISION Refer to decision whether the company wants to sell the product now (as it is), or further processed it to earn additional revenue. Example: Product AA (SP = 10.00) further process Product Super AA (SP = 15.00) Questions to consider: How much revenue will the company generate if it sells the product now (as it is)? How much revenue will the company generate if it sells the product after processing it further? How much costs will the company spend to process the product further? Principle the company will process further if incremental revenue from further processing is more than incremental cost to process it further.
SINGLE PRODUCT Pak Seman is a mango farmer. He is planning for the upcoming harvest of mangoes. The estimated production of fresh mangoes for this season is 10,000 kilograms. Pak Seman will spend RM2,000 on pre-harvest expenses for preparing the crop. Two options are available to Pak Seman for selling mangoes. Calculate which option will maximize Pak Seman s profit. Option B Option A Dehydrate the fresh mangoes and sell as dried mangoes at RM12,000 for 1,000 kg. 10,000 kg of fresh mangoes can be processed into 2,000 kg of dried mangoes. The cost of the dehydration process is RM500 for 1,000 kg fresh mangoes. Packaging and storage of dried mangoes cost RM3,000 for 1,000 kg. Transportation cost of dried mangoes is RM500 for 1,000 kg. Sell fresh mangoes to retailers at RM1,500 for 1,000 kg Packaging would cost RM200 for1,000 kg Transportation cost is estimated at RM300 for 1,000 kg Revenue (1,500 x 10) Packaging (200 x 10) Transportation (300 x 10) Profit 15,000 2,000 3,000 10,000 Revenue (12,000 x 2) Dehydration cost (500 x 10) Packaging (3,000 x 2) Transportation (500 x 2) Profit 24,000 5,000 6,000 1,000 12,000 RM2,000 on pre-harvest expenses for preparing the crop is irrelevant cost Higher profit Further process into dried mangoes
Costs = RM100,000 JOINT PRODUCTS Aloe Vera Total = RM250,000 Irrelevant to decision Costs = RM150,000 Common Process Split off point Shampoo Sales Value = RM120,000 Cleanser Sales Value = RM180,000 Further processing Further processing FP Costs = RM75,000 FP Costs = RM27,500 Purifying cleanser Conditioning shampoo Sales Value = RM150,000 Sales Value = RM250,000 Incremental Revenue (150,000 120,000) Incremental costs Increase in Profit 30,000 27,500 2,500 Incremental Revenue (250,000 180,000) Incremental costs Increase in Profit 70,000 75,000 (5,000)
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