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 $330,000 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 $ 16.00 per pound 12,200 pounds B $ 10.00 per pound 19,100 pounds C $ 22.00 per gallon 3,400 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 $ 61,390 $ 20.70 per pound B $ 87,645 $ 15.70 per pound C $ 35,300 $ 29.70 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) Calculate financial advantage (disadvantage)

	A	B	C
Selling price after further processing	20.70	15.70	29.70
Selling price at split off	16	10	22
Incremental selling price	4.70	5.70	7.70
Quantity	12200	19100	3400
Incremental revenue	57340	108870	26180
Incremental cost	-61390	-87645	-35300
Financial advantage (disadvantage)	-4050	21225	-9120

2) Analysis

	A	B	C
Sell at split off	Yes	No	Yes
Sell after further processing	No	Yes	No