Upgrade Decision for Product X-547: What Factors Should Park Incorporated Review?

Question:

When making the upgrade decision for product X-547 to become Xylene, which of the following items should Park Incorporated review?

a. Selling price per pound of X-547

b. Variable manufacturing costs of the upgrade process

c. Avoidable fixed costs of the upgrade process

d. Selling price per pound of Xylene

Answer:

When deciding whether to upgrade product X-547 to Xylene, Park Incorporated should review options 1, 2, 3, and 4, which include the selling price per pound of X-547 and Xylene, variable manufacturing costs of the upgrade process, and avoidable fixed costs of the upgrade process. Joint manufacturing costs (option 5) are typically considered sunk costs and would not affect the decision to upgrade. Option b is correct.

Explanation:

The factors that Park Incorporated needs to review when deciding whether to upgrade the product X-547 to Xylene involve an analysis of costs and revenues. These include: (1) Selling price per pound of X-547 and Xylene, (2) Variable manufacturing costs of the upgrade process, and (3) Avoidable fixed costs of the upgrade process.

Joint manufacturing costs to produce X-547 (option 5) are typically irrelevant in making the decision because it is a sunk cost: these costs have already been incurred and will not be affected by the decision to upgrade or not.

Therefore, the items to be reviewed when deciding whether or not to upgrade are 1, 2, 3, and 4 which would make the correct answer option (b).