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 $350,000 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	$	20.00	per pound		13,000	pounds
B	$	14.00	per pound		20,300	pounds
C	$	26.00	per gallon		4,200	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	$	70,950	$	25.10	per pound
B	$	101,905	$	20.10	per pound
C	$	43,780	$	34.10	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

1.

Product	Selling price at split off (i)	Output (ii)	Sales value at split off (i) x (ii) = (iii)	Selling price after further processing (iv)	Sales value after further processing (ii) x (iv) = (v)	Incremental sales revenue (v) - (iii) = (vi)	Further processing costs (vii)	Incremental income (loss) (vi -(vii)
A	20	13,000	260,000	25.10	326,300	66,300	70,950	-4,650
B	14	20,300	284,200	20.10	408,030	123,830	101,905	21,925
C	26	4,200	109,200	34.10	143,220	34,020	43,780	-9,760

	Product A	Product B	Product C
Financial advantage (disadvantage) of further processing	-4,650	21,925	-9,760

2.

	Product A	Product B	Product C
Sell at split off point	Yes	No	Yes
Process further	No	Yes	No