Jimbob Co. is considering offering each of the three products the company manufactures at two levels - "Standard" and "Advanced". Currently all products are processed to the "Standard" level and all products manufactured at this level can be sold. Management believes that it will be possible to generate additional sales revenue and profits by further processing some of units of the "Standard" level products to the "Advanced" level. Fixed costs will not change in total. In making the decision whether it should process products further which decision rule should be followed?
A)If there is a positive contribution margin at the "Advanced" level, then process further.
B)If the projected selling prices at the "Advanced" level are at least 20% greater than those at the "Standard" level, then process further.
C)If the difference in the selling price of units at the "Advanced" level over the selling prices of units at the "Standard" level is greater than the additional unit costs of processing from the "Standard" level to the "Advanced" level, then process further.
D)If the unit costs at the "Advanced" level are greater than the unit costs at the "Standard" level, do not further process.

Question

Quizplus · Accepted Answer

The decision to further process products should be based on whether the additional revenue generated by selling at the "Advanced" level exceeds the additional costs of processing. Therefore, the decision rule should be based on the difference in selling price between the two levels and the additional unit costs of processing. Option C accurately reflects this decision rule.

Jimbob Co Is Considering Offering Each of the Three Products the the Company