Question

Joint cost allocation: additional processing beyond split-off point In a certain production process 100 000 kg of a single raw material were processed at a cost of $350 000. At split-off two intermediate products, A and B emerged, weighed as 60 000 kg of A and 40 000 kg of B. A was processed further at a cost of $45 000 to produce C, and B was processed further at a cost of $25 000 to produce D. C sold for $4.50 per kg. Required: (a) If A was allocated $187 500 of the joint production costs under the net realisable value method, what was the selling price of D? (b) Suppose the firm receives an offer to buy all of product A for $2 per kg at the split-off point. Would the firm be better off selling A or processing further to produce C? By how much?

Answer 1

Answer for (a)

It is assumed that allocation is done on basis of net realisable value is for C.

Let D selling price be T.

Calculation of selling price of D:

(60000 kg×$4.5)/[(60000 kg ×$4.5)+(40000 kg×T)]×$350000

=$187500

$270000×$350000/$187500=$270000+40000T

$504000-$270000=40000T

T=$5.85.

Answer for b)

Here,I would recommend to furthur process A into C as at A it would result in loss of $67500(($2×60000 kg)-$187500).

If it is furthur processed to C then it would result in profit of $37500(($4.5×60000 kg)-$187500-$45000).

It would make a difference of change in excess by $105000

($270000-$120000-$45000)