A company produces three products Good, Better, and Best. All the three products are processed from a single raw material input. Product "Better” however, can be processed further at an annual cost of $30,000. The processed product will generate an annual revenue of $90,000 against the annual revenue generated for $55,000 at the split-off point. What is the financial advantage/disadvantage to process the product “Better” further? a. The annual financial advantage to process the product “Better” further is $35,000. b. The annual financial disadvantage to process the product “Better” further is $35,000. c. The annual financial advantage to process the product “Better” further is $5,000. d. The annual financial disadvantage to process the product “Better” further is $25,000.
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Explanation:
Let's take Better and Best products. One needs to check in the market what volumes are sold in each category. If Best products volume is less, less competition but highly profitable. Then the decision to invest 30k is based on sales volume and profitability.
In petrol we have high grade petrol priced 10Rs more than normal petrol. Shell actively promotes it. Is it worth Manufacturing? It depends on volume and profitability.
One can take a decision from manufacturing angle too. Instead of making 3 ranges , one can decide to make only Good and Best and increase productivity by making a small investment.
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