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 $350,000 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	$	20.00	per pound		13,000	pounds
B	$	14.00	per pound		20,300	pounds
C	$	26.00	per gallon		4,200	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	$	70,950	$	25.10	per pound
B	$	101,905	$	20.10	per pound
C	$	43,780	$	34.10	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

Calculation of financial advantage (disadvantage)
	A	B	C
Selling price after further processing	25.1	20.1	34.1
selling price at split off point	20	14	26
incremental selling price	5.1	6.1	8.1
quantity	13000	20300	4200
incremental revenue	66300	123830	34020
additional costs	70950	101905	43780
incremental profit(loss)	-4650	21925	-9760
b)	A	B	C
sell at split off point	yes	no	yes
further process	no	yes	no

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