Question

Sell or Process Further, Basic Analysis Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow: Direct materials $95,000 Direct labor 43,000 Overhead 85,000

The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000.

Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost $8,500 per quarter. Required:

1. What is the operating profit earned by the four products for one quarter? $

2. CONCEPTUAL CONNECTION: Should the division process Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit? Gross profit would by $ .

ANSWER

1. What is the operating profit earned by the four products for one quarter?
$

2. CONCEPTUAL CONNECTION: Should the division process Delta further or sell it at split-off?
The company should process Delta further.

What is the effect of the decision on quarterly operating profit?

Gross profit would increase  by $.

Answer 1

1. Operating Profit = (100,000 + 93,000 + 30,000 + 40,000) - (95,000 + 43,000 + 85,000)

=40,000

2.

	Sell	Process Further
Revenue	40,000.00	75,000.00
Further Processing cost		23,900.00
Operating Profit	40,000.00	51,100.00

Gross profit would increase  by $.11,100

They Should Further process the delta for profit maximaziation