Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $370,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	24.00	per pound		13,800	pounds
B	$	18.00	per pound		21,500	pounds
C	$	30.00	per gallon		5,000	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	81,150	$	29.50	per pound
B	$	117,125	$	24.50	per pound
C	$	52,900	$	38.50	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

1. Computation of incremental profit and (loss) at split off point:

Particulars	Product A	Product B	Product C
Selling price after further processing	29.50	24.50	38.50
- Selling price at the split off point	24	18	30
Incremental revenue per pound/gallon	5.5	6.5	8.5
Total quarterly output	13800	21500	5000
Total incremental revenue	75900	139750	42500
- Additional processing costs	81150	117125	52900
Incremental profit/loss	(5250)	22625	(10400)

2. Product A and C should be sold at the split off point because their incremental revenues are loss then the total processing costs. It would not generate any more profit from further splitting thus should be sold.

Only Product B can be processed further because it is generating further profits so there is scope of further splitting.

In the given question, Product B only turns out to be profitable to Dorsey company.

answered by: anonymous