Question

# Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing...

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?

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.

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