Question

Exercise 11-7 Sell or Process Further Decisions [LO11-7]

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $365,000 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	$	23.00	per pound		13,600	pounds
B	$	17.00	per pound		21,200	pounds
C	$	29.00	per gallon		4,800	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	$	78,540	$	28.40	per pound
B	$	113,230	$	23.40	per pound
C	$	50,560	$	37.40	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?

	Product A	Product B	Product C
Sell at split-off point?
Process further?

Answer 1

1)Joint cost is a irrelevant cost to decision making as to further processing as same is sunk cost (already incurred cost)

	A	B	C
Sales From further processing	28.4*13600= 386240	23.4*21200= 496080	37.4*4800=179520
less:
Sales at split off	23*13600= 312800	17*21200= 360400	29*4800= 139200
Additional processing cost	78540	113230	50560
Financial advantage /(disadvantage)	-5100	22450	-10240

2)

	A	B	C
Financial advantage /(disadvantage)	-5100	22450	-10240
If there is financial advantage ,it should be processed further and if disadvantage ,it should be sold at split off	Split off	Further processed	Split off