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 $390,000 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	$	28.00	per pound		14,600	pounds
B	$	22.00	per pound		22,700	pounds
C	$	34.00	per gallon		5,800	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	$	91,990	$	33.90	per pound
B	$	133,305	$	28.90	per pound
C	$	62,660	$	42.90	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

2 Solution :-

Particulars	A	B	C
Selling price after further processing (a)	$33.90	$28.90	$42.90
Selling price at the split-off point (b)	$28	$22	$34
Incremental Revenue per pound or gallon (a - b) = (c)	$5.90	$6.90	$8.90
Total quarterly output in pounds or gallon (d)	14,600	22,700	5800
Total incremental Revenue (c × d) = (e)	$86,140	$156,630	$51,620
Total incremental processing cost	$91,990	$133,305	$62,660
Total incremental profit or loss	($5850)	$23,325	($11,040)

Conclusio:- Only Product B should be processed further