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    Sell or Process Further Decisions

    When a single input or raw material creates multiple products, these products are known as joint products. Joint product costs are costs that are allocated to processing the joint product before the split-off point, that is, the point at which the input is split off into separate products.

    Deciding what to do with a product from the split-off point forward is known as a sell or process further decision. In sell or process further decisions, managers look at the incremental operating income from processing the product further. By this point, joint costs have already occurred, and are treated as sunk costs. Accordingly, it is always profitable to continue processing a joint product after the split-off point as long as the incremental revenue exceeds the incremental cost.

    For example, wineries often harvest grapes for a number of different wines and blends. They may produce the final wine themselves, or sell the grape juice to other wine makers. The popular wine Fuzion, for example, buys all its grapes from producers who choose to sell (at least portions) of their grapes or grape juice.

    Imagine you are a producer of Malbec grapes in Mendoza, Argentina. Once the grapes are grown and processed into juice, they can be sold to Fuzion or processed further into your private label brand and aged for 5 years before sold. The grape juice costs $2/litre to grow and process. The grape juice can be sold for $3/litre. It costs $5/litre more to turn the juice into wine, and $1/litre to store the wine each year. A 5-year Malbec sells for $12/litre.

    Cost of Juice           $2/litre
    Sell Juice                $3/litre

    Incremental Cost: $5/litre + 5*$1/year = $10/litre
    Incremental Revenue: $12/litre - $3/litre (price of juice) = $9/litre

    Therefore, you are better off selling the grape juice to Fuzion then processing it further yourself. The cost of growing the grapes is considered a sunk cost, and irrelevant to the decision. 

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