Question

P7.57B  

Prepare an incremental analysis for the decision whether to sell or process materials further.

14(LO 4) The following information is for a company that produces four types of microprocessors using the same production process. The common costs of these products, up to the split-off point, are $550,000. Common costs are allocated based on the quantity of output. The following information includes additional processing costs, the selling price of each product at the split-off point, and the selling price of each product after further processing:

Microprocessor	Number of Units Produced	Selling Price at Split-Off Point	Selling Price after Further Processing	Additional Costs for Further Processing
1	3,000	$10.00	$15.00	$14,800
2	4,000	9.50	12.25	8,500
3	2,500	11.00	15.70	12,000
4	500	7.75	10.25	1,250

Instructions

a.  

Assuming only one product can be processed further, determine which one the company should choose. Briefly explain why.

Product 2

b.  

Referring to your answer in part (a), identify which information is relevant to the decision to process this product further.

c.  

If common costs up to the split-off point were allocated on the basis of the market values at the split-off point, would your decision in part (a) be different? Briefly explain why.

Answer 1

				M1	M2	M3	M4
Incremental revenue
Sales after further processing				45000	49000	39250	5125
Ssale at split off				30000	38000	27500	3875
Incremental revenue				15000	11000	11750	1250
Less: Further processing cost				14800	8500	12000	1250
Incremental income				200	2500	-250	0
Req a:
Microprocessor 2 shall be processed further
Req b:
Relevant for decision making:
Sales after processing further
Sales at split off
Further processing cost
Units produced
Req c:
No allocation of Joint cost will not make any difference.
As it is sunk cost, hence irrelevant for decision