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Swine Enterprises produces hams from locally raised pigs. The cost of getting the meat ready for...

Question:

Swine Enterprises produces hams from locally raised pigs. The cost of getting the meat ready for the market is $1 per pound. Hams weigh 12 pounds and sell for $1.50 per pound. The company can smoke the hams for and additional $0.50 per pound. The smoke hams would sell for $2.25 per pound.

Should the company smoke the ham? What if the selling price were $1.75 per pound?

Relevant Cost:

Relevant cost are very important when making decisions. A cost is considered to be relevant when it differs among alternatives. It is usually considered in a make or buy and sell now or process further business decisions. Relevant cost include avoidable cost.

Answer and Explanation:

Profit if not Processed Further
Selling Price 1.50
Cost 1.00
Profit 0.50
Weight of Ham 12
Profit 6


Profit if Ham is smoked and sold at 2.25
Selling Price 2.25
Cost (1.00+0.50)1.50
Profit 0.75
Weight of Ham 12
Profit 9


Profit if Ham is smoked and sold at 1.74
Selling Price 1.72
Cost (1.00+0.50)1.50
Profit 0.25
Weight of Ham 12
Profit 3

Decision: If the smoked ham will be sold at 2.25 per pound, this should considered because profit will increase by 0.25 per amount or a total of $3. However, when the price of a per pound smoked ham is only 1.75, do not process further the ham because it will decrease the per pound profit of 0.25.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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