Question

Exercise 12-7 Sell or Process Further Decisions [LO12-7]

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?

Answer 1

Ans:

		A	B	C
	New Selling Price	$28.40	$23.40	$37.40
	Existing Selling price	$23.00	$17.00	$29.00
	Increase in selling price	$5.40	$6.40	$8.40
	Units	13600	21200	4800
	Incremental revenue	$73,440.00	$135,680.00	$40,320.00
	Incremental cost	$78,540.00	$113,230.00	$50,560.00
Answer 1	Advantage (Disadvantage)	($5,100.00)	$22,450.00	($10,240.00)
Answer 2	Sell or further process	Sell	Process	Sell

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