Question

The Herman Company uses a joint process to produce products W, X, Y and Z. Each...

The Herman Company uses a joint process to produce products W, X, Y and Z. Each product may be sold at its split-off point or processed further. Joint processing costs for a single batch of joint products are $32,500. Other relevant data are as follows:

Product

Sales Value

at Split-Off

Additional Costs

of Processing

Sales Value

of Final Product

W

$7,500

$9,000

$ 22,500

X

13,500

7,500

20,000

Y

9,000

12,500

15,000

Z

6,500

5,500

    12,500

$36,500

$34,500

$70,000

Calculate the effect on profits of processing each product beyond the split-off point.

Calculate the effect on profits of processing only those with a positive contribution beyond the split-off point.
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Answer #1

Calculate the effect on profits of processing each product beyond the split-off point.

Product W Product X Product Y Product Z
Sales value after further processing 22500 20000 15000 12500
Sales value at split off point 7500 13500 9000 6500
Incremental revenue 15000 6500 6000 6000
Less: Incremental cost 9000 7500 12500 5500
Incremental profit 6000 (1000) (6500) 500

Calculate the effect on profits of processing only those with a positive contribution beyond the split-off point.

Only product W and Z should be further processing so profit will increase by 6000+500 = 6500

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