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 $305,000 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	$	11.00	per pound		11,200	pounds
B	$	5.00	per pound		17,600	pounds
C	$	17.00	per gallon		2,400	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	$	50,340	$	15.20	per pound
B	$	71,170	$	10.20	per pound
C	$	25,600	$	24.20	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

1.

Financial advantage of further processing = [(selling price after additional processing - Selling price at split off) * Quarterly output] - Additional processing costs

A = [(15.2 - 11) * 11,200] - 50,340 = 3,300 financial disadvantage

B = [(10.2 - 5) * 17,600] - 71,170 = 20,350 financial advantage

C = [(24.2 - 17) * 2,400] - 25,600 = 8,320 financial disadvantage

2.

Products A and C should be sold at splitoff.

(as there is financial disadvantage from processing further)

Product B should be processed further.

(as there is financial advantage from processing further)