# Sell or Process Decisions

Should a business sell its product immediately, or should it sell them at a premium after further processing?

This is a common concern for organizations looking for ways to add more value to their products. A business can increase its profit if the additional revenue from further processing exceeds the extra cost.

Sell-or-process decisions involve the cost-benefit analysis of further processing of a product or service.

When evaluating sell-or-process decisions, it is important to compare the incremental revenue and cost of further processing.

Unavoidable costs incurred before any additional processing takes place are not relevant to sell-or-process decisions.

## Example

Lisa, a farmer, is planning for the upcoming harvest of grapes.

The estimated production of fresh grapes for this season is 10 MT.

Lisa will spend \$2000 on pre-harvest expenses for preparing the crop.

Two options are available to Lisa for selling grapes.

### Option A

Sell fresh grapes to retailers.

The expected selling price of fresh grapes is \$1500 / MT.

Packaging would cost \$200 / MT.

Transportation cost is estimated at \$300 / MT.

### Option B

Lisa can dehydrate the fresh grapes in summer and sell them as dry grapes in winter.

10 MT of fresh grapes can be processed into 2 MT of dry grapes.

The price of dry grapes in winter is estimated at \$12,000 / MT.

The cost of the dehydration process is \$500 / MT of fresh grapes.

Packaging and storage of dry grapes cost \$3000 / MT.

Transportation cost of dry grapes is \$500 / MT.

### Calculate which option will maximize Lisa’s profit.

We need to compare the incremental revenue of each option with its incremental cost.

 Option AImmediate Sale Option BFurther Process Sales Revenue 15,000   [\$1,500 × 10 MT] 24,000   [\$12,000 × 2 MT] Processing Cost - (5,000)   [\$500 × 10 MT] Packaging & storage 2,000   (\$200 × 10 MT) (6,000)   [\$3,000 × 2 MT] Transport 3,000   (\$300 × 10 MT) (1,000)   [\$500 × 2 MT] Total cost` 10,000 12,000

### Option B is more profitable.

Pre-harvest costs are unavoidable and therefore ignored in the calculation.

## Joint Products

Sell-or-process decisions involving joint products should only consider costs after the split-off point (i.e. when joint products can be identified separately).

Joint products are manufactured simultaneously in a joint process and share common inputs.

For example, slaughtering a cow (joint process) produces beef and leather (joint products). The cow is the common input of joint products.

Joint costs (i.e. costs up to the split-off point) are not relevant to the decision as they are unavoidable.

## Example

Pharma Inc. produces two medical products from a joint process: Aspro and Brufo.

Information relating to the two products is as follows:

 Aspro Brufo \$ \$ Sales revenue 10,000 15,000 Joint cost (6,000) (9,000) Contribution 4,000 6,000

Brufo can be processed further to produce Citro.

Citro can be sold for \$20,000 but requires additional processing cost of \$3000.

### Should Brufo be sold immediately or processed further?

Additional revenue from selling Citro is \$5000 (\$20,000 - \$15,000).

The additional cost of producing Citro is \$3000.

Since the incremental revenue from further processing exceeds the additional cost, Citro should be produced.