Question

Exercise 7.27 Net Realizable Value Method, Decision to Sell at Split-off or Process Further

Pacheco, Inc., produces two products, overs and unders, in a single process. The joint costs of this process were $50,000, and 14,000 units of overs and 36,000 units of unders were produced. Separable processing costs beyond the split-off point were as follows: overs, $18,000; unders, $23,040. Overs sell for $2.00 per unit; unders sell for $3.14 per unit.

Required:

1. Allocate the $50,000 joint costs using the estimated net realizable value method.

2. Suppose that overs could be sold at the split-off point for $1.8 per unit. Should Pacheco sell overs at split-off or process them further? Show supporting computations.

Answer 1

1
	Overs	Unders	Total
Units produced	14000	36000
Multiplied by Selling price per unit	2	3.14
Total sales value	28000	113040
Less: Separable processing costs	18000	23040
Net realizable value	10000	90000	100000
Allocated joint cost Overs	5000	=50000*10000/100000
Allocated joint cost Unders	45000	=50000*90000/100000
2
Revenue if sold at split off point	25200	=14000*1.8
Net realizable value if processed further	10000
Net change in income	15200	(25200-10000)
Overs should not be processed further as there will be $15200 more profit if sold at split off point.