Question

Sell at Split-Off or Process Further

Bozo Inc. manufactures two products from a joint production process. The joint process costs $110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for $55 per pound. HS can be sold at split-off for $13 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost $51,000 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for $56 per pound.

Required:

1. What is the contribution to income from selling the 14,000 pounds of HS at split-off?
$

2. Conceptual Connection: What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS?
$

Should Bozo continue to sell the HS at split-off or process it further into CS?

Answer 1

Solution 1:

Contribution to income from selling 14000 pounds of HS at split off point = 14000*$13 = $182,000

Solution 2:

Contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS = Sales value of CS - Further processing cost

= 4000*$56 - $51,000 = $173,000

Solution 3:

As contribution to income on further processing is lesser than contribution to income at split off point, therefore Bozo should continue to sell the HS at split off.