Question

Exercise 12-7 Sell or Process Further Decisions [LO12-7]

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $320,000 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	$	14.00	per pound		11,800	pounds
B	$	8.00	per pound		18,500	pounds
C	$	20.00	per gallon		3,000	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	$	56,850	$	18.50	per pound
B	$	80,875	$	13.50	per pound
C	$	31,300	$	27.50	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

a
	Product A	Product B	Product C
Selling price after further processing	18.5	13.5	27.5
Selling price at the split-off point	14	8	20
Incremental revenue per pound or gallon	4.5	5.5	7.5
Total quarterly output in pounds or gallons	11800	18500	3000
Total incremental revenue	53100	101750	22500
Total incremental processing costs	56850	80875	31300
Financial advantage (disadvantage)	-3750	20875	-8800
b
Product A and Product Cshould be sold at the split-off point
Product B should be processed further