New York Liberty Corporation makes miniature Statutes of Liberty from cast iron. Sales total 40,000 units a year. The statutes are finished either rough or polished, with an average demand of 60% rough and 40% polished. Iron ingots, the direct material, costs $6 per pound. Processing costs are $200 to convert 20 pounds into 40 statutes. Rough statutes are sold for $15 each, and polished statutes can be sold for $18 or engraved for an additional cost of $5. Polished statues can then be sold for $30.
Required:
Determine whether New York Liberty Company should sell the engraved statutes. Why?
Answer:
New York Liberty should engrave the statutes because they increase profits by $7 per statute.
| Rough | Polished | |||
| Sales | $15.00 | $18.00 | ||
| Cost of Sales:
Materials ($6 x 20)/40 Conversion $200/40 |
$3.00 5.00 |
8.00 |
$3.00 5.00 |
8.00 |
| Operating Income (loss) | $7.00 | $10.00 |
| Sales, polished and engraved | $30.00 | |
| Costs:
Materials Conversion Additional Processing |
$3.00 5.00 5.00 |
13.00 |
| Advantage of processing further | $17.00 |
