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Do it: 7-3: Mesa Verde manufactures unpainted furniture for the do-it-yourself market. It currently sells the table for $75.
Production costs are $40 variable and $10 fixed. Mesa Verde is considering staining and sealing the table to sell it for
$100. Variable costs to finish each table are expected to be $17 and fixed costs are expected to be 3 dollars.
Prepare an analysis showing whether Mesa Verde should sell unpainted or finished tables.
I like to do these sell or process further as a decision tree. Before the split off point, we have the sunk or joint costs
, which are NOT relevant. At that point, we can choose to sell as is and take that value, or process further and ask a higher value. In this
problem, the company can sell the table unfinished for $75 or sell it for $100 after spending 17 more in variable cost and an
additional three dollars in fixed
cost.
When we compare $75 to the difference between 100 less $20 which is 80 it looks like we should finish as many as we can because
we will make five dollars more on each table.
If you want to do it the Wiley plus way, note that you need a column for Sell and a column for Process Further.
Each column will have a revenue or sales line and costs for each alternative. The difference between the per unit sales
and cost or totals versus the process further will give you the net in the third column.
You will get the same answer doing it this way. There is still, in this problem a $5 increase if you process the table further.
Remember we need to think about what our relevant costs. Even if Wiley plus puts those costs in both columns they are not relevant if
the cost shows up in each one only the difference the incremental amount becomes relevant.