Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $375,000 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 | $ | 25.00 | per pound | 14,000 | pounds | |
B | $ | 19.00 | per pound | 21,800 | pounds | |
C | $ | 31.00 | per gallon | 5,200 | 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 | $ | 83,800 | $ | 30.60 | per pound |
B | $ | 121,080 | $ | 25.60 | per pound |
C | $ | 55,280 | $ | 39.60 | 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?
1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
Product A | Product B | Product C | |
Selling price after further processing | 30.60 | 25.60 | 39.60 |
Selling price at split off point | 25 | 19 | 31 |
Incremental selling price | 5.60 | 6.60 | 8.60 |
Quantity | 14000 | 21800 | 5200 |
Incremental revenue | 78400 | 143880 | 44720 |
Incremental Cost | -83800 | -121080 | -55280 |
Incremental profit (loss) | -5400 | 22800 | -10560 |
b) Analysis
Product A | Product B | Product C | |
Sale after further processing | No | Yes | No |
Sale at split off point | Yes | No | Yes |
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