Holmes Company produces a product that can either be sold as is or processed further. Holmes has already spent $50,000 to produce 1,250 units that can be sold now for $67,500 to another manufacturer. Alternatively, Holmes can process the units further at an incremental cost of $250 per unit. If Holmes processes further, the units can be sold for $375 each. Compute the incremental income if Holmes processes further.

It is more profitable to continue processing.

Explanation:

Giving the following information:

The number of units= 1,250

It can be sold now for $67,500 to another manufacturer.

Alternatively, Holmes can process the units further at an incremental cost of $250 per unit. If Holmes processes further, the units can be sold for $375 each.

The $50,000 is a sunk cost, meaning that it has already happened. It shouldn't be taken into account.

Sell as it is:

Income= $67,500

Continue production:

Income= 1,250*(375 - 250)= $156,250

It is more profitable to continue processing.

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