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?
Ans:1
Product A |
Product B |
Product C |
|
Selling price after further processing |
25.10 |
20.10 |
34.10 |
Selling price at split off point |
20.00 |
14.00 |
26.00 |
Incremental selling price |
5.1 |
6.1 |
8.1 |
Quantity |
13000 |
20300 |
4200 |
Incremental revenue |
66300 |
123830 |
34020 |
Additional Cost |
-70950 |
-101905 |
-43780 |
Incremental profit (loss) |
-4650 |
21925 |
-9760 |
2.Analysis
Product A |
Product B |
Product C |
|
Sell at split off point |
Yes |
No |
Yes |
Process further |
No |
Yes |
No |
Hope this helped ! Let me know in case of any queries.
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