Sometimes companies must decide whether to sell a product in its current state or process it further. Consider the case of a lemon grower. Should the company sell the lemons as is or process them further and produce lemonade? Another example would be a producer of sports cards: The company can sell the card as is or add an autograph and sell it as a collectible. When making this type of decision, companies consider the following questions:
Let’s look at the example of a sports card producer. The company can sell a box of unsigned cards for $50 per box. If it adds one card signed by a random former player, it can sell the box for $75. It will cost $20 per box to add the randomly signed cards.
When making this decision, you would ignore the costs to produce the baseball card, since the company will incur those costs regardless of the decision to add a signature. You would analyze whether to add the signature as follows:
|
-
| Sell now | Process further | Difference |
|---|---|---|---|
| Expected revenue per box | $50 | $75 | $25 |
| Additional costs of processing |
-
| $20 | $20 |
| Total net revenue | $50 | $55 | $5 |
In this situation, the company should choose to add the signature, since it would earn an additional $5 per box of cards.