Question

Guster Chemical Company (GCC) manufactures two products as part of a joint process: X1 and Y1. Joint costs up to the split-off point total $27,000. The joint costs are allocated to X1 and Y1 in proportion to their relative sales values. At the split-off point, product X1 can be sold for $40,250, whereas product Y1 can be sold for $74,750. Product X1 can be processed further to make product X2, at an incremental cost of $43,000. X2 can be sold for $90,000. Product Y1 can be processed further to make product Y2, at an incremental cost of $53,000. Y2 can be sold for $100,000.

a.The net change in operating income resulting from a decision to manufacture product X2 is?

b.The net change in operating income resulting from a decision to manufacture product Y2 is?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) Change in net operating income if Product X2 is manufactured = Revenue from X2 - additional cost - revenue forgone of X1 = 90000-43000-40250 = $ 6750 Thus the operating income will increase by $ 6750 Part 2) Change in net operating income if Product Y2 is manufactured = Revenue from Y2 - additional cost-revenue forgone of Y1 = 100000-53000-74750 = $ 27750 Thus the operating income will decrease by $ 27750