Question

Exercise 12-7 Sell or Process Further [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 $350,000 per quarter. 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	$	16	per pound		15,000	pounds
B	$	8	per pound		20,000	pounds
C	$	25	per gallon		4,000	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	$	63,000	$	20	per pound
B	$	80,000	$	13	per pound
C	$	36,000	$	32	per gallon

Required:
a.	Compute the incremental profit (loss) for each product.

      

b.

Which product or products should be sold at the split-off point? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Product A
	Product B
	Product C

c.

Which product or products should be processed further? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Product A
	Product B
	Product C

Answer 1

a) Compute the incremental profit (loss) for each product.

	Product A	Product B	Product C
Sale price after further processing	20	13	32
Sale price at split off point	16	8	25
Incremental sale price	4	5	7
Quantity	15000	20000	4000
Incremental sales revenue	60000	100000	28000
Less: Additional cost	-63000	-80000	-36000
Incremental profit (loss)	-3000	20000	-8000

b) Product A and product C should be sold at split off point

c) Product B should be sold after further processing